A Closer Look at Simon’s Offer and General Growth’s Response

February 16th, 2010 | by admin |

Yesterday’s $9 per share bid from Simon Property Group (SPG), even if it does not materialize, is very good for General Growth Properties’ (GGWPQ.PK) shareholders and for GGP to remain as a standalone independent entity. Even if shares were issued at a buy-out price of $9 per share to pay off the $7 billion unsecured, the current shareholders would keep 30% (assuming they convert the unsecured debt to equity in full) of the reorganized company.

So, in essence, the floor price has been price set for new capital coming in to replace unsecured debt from the best to the worst case scenarios: independent public or private secondary offering, acquisition, or court-style cramdown (debt to equity exchange) on unsecured debtholders.

So while the offer to buy GGP was too good to pass, SPG “unwittingly” (although I am sure David Simon knows this) has made it easier and less onerous on its rival GGP (and its shareholders) to survive and compete on its own.

Simon’s motives for the current offer

There are two possibilities as to why SPG would have made this offer.

SPG thinks that no other party would trump this offer (or even come forward to put equity capital at $9 per share).
This is SPG’s initial bid in the negotiation game that will ensue and SPG plans to sweeten the offer.

Considering the rumored interest of Brookfield Asset Management (BAM) in GGP and the backdoor negotiations reported in the WSJ, I am skeptical that SPG actually believes that the former is true and that this is the best outcome for GGP stakeholders.

I speculate the latter is true even though SPG said in its press release that the offer is not “open ended.” Considering SPG’s wherewithal (it is well capitalized and has access to bond and capital markets) and the unique once-in-a-lifetime buying opportunity that GGP presents, I think there may be another bid from SPG soon.

GGP’s incentives

Due to the incentives for the two people sitting on GGP’s board, John Bucksbaum (the founder’s son – the Bucksbaum family trust owns >20%) and Wall Street insider Bill Ackman (>25%), the average Joe retail shareholder could not have asked for a better deal in protecting the existing equity interest throughout this restructuring process.

GGP responded to Simon’s offer yesterday by stating:

We and our board of directors have given considerable thought to your indication of interest and have concluded based on discussions with other interested parties that it is not sufficient to preempt the process we are undertaking to explore all avenues to emerge from Chapter 11 and maximize value for all the Company’s stakeholders.

If another sweetened offer does come from SPG (say $15 per share), I think Bill Ackman would be more likely to monetize his fund’s outsized gains in this investment and move on. However, this being a generational business for founder’s family, I am not so sure that would be the case with John Bucksbaum, as one analyst commented in the WSJ. I would also guess that the top executives that are also on the board, including the CEO and COO, would prefer a standalone company as the outcome. Their jobs would be at stake in an M&A with SPG.

With all these varying incentives, should another sweetened offer come by, it would be a real test for the board to see if they truly perform their so called fiduciary duty on behalf of the shareholders .

Disclosure: I used to hold a long position in GGP

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