News broke this morning that the world’s largest mall-operator Simon Property Group (SPG) would make a $10 billion bid for key competitor General Growth Properties (GGWPQ.PK). The deal would lift GGP out of bankruptcy by paying off the approximately $7 billion due to creditors, which according to the press release is 100% cash recovery including accrued interest and dividends to all unsecured creditors. However, this deal was made public after Simon’s private advances were not acknowledged, as General Growth Properties has an alternative course of action in which Brookfield Asset Management (BAM) would provide GGP with the capital they need in return for an equity stake. This option would allow GGP to eventually emerge from bankruptcy as an independent company.
Simon Properties’ offer would create a giant in the commercial real estate market that would stand head and shoulders above competitors in terms of market share. According to the Wall Street Journal, the combined company would control over 550 malls or more than a third of the U.S. market. Furthermore, in the highly sought after malls rated “A quality” (because of the amount of sales generated per square foot) the combined company would own 148 of the 307 “A quality” malls in the country. Increasing exposure in such a huge way would give Simon an upper-hand when negotiating lease contracts and financing terms with retailers. We have not yet read any reports of regulators becoming involved in an antitrust case should the deal be accepted, but with that sort of market share it would seem a reasonable concern.
The alternative plan involves Brookfield Asset Management, which has already bought $1 billion of GGP’s unsecured debt. While no formal offer has been made public, there are reports that GGP would consider a plan to exchange equity for more of BAM’s capital in order to remain independent. It seems that this would be the option which Chairman John Bucksbaum would favor, as it was his father and uncle who founded the company and his family retains about 23% of GGP shares.
The battle lines would seem to lie between Mr. Bucksbaum and activist investor, hedge fund manager, and board member Bill Ackman who will champion the Simon Properties deal. His hedge fund acquired nearly a quarter of the company’s outstanding shares after bankruptcy brought them down to around $2. With the stock currently trading around $12 per share that would represent a six-bagger on his original investment, any investors would be glad to have that kind of return in under a year’s time. Obviously, bankruptcy courts will need to approve of whatever course of action GGP elects to take.
At Ockham, we do not have a valuation rating on GGWPQ currently because we generally do not cover a stock after it falls into bankruptcy. As for SPG, we recently downgraded it to Overvalued from Fairly Valued, as we believe the price is too rich for the underlying fundamentals. The mall business has been hit very hard in as consumer behavior has become thriftier, yet SPG has advanced 64% in the last twelve months. This move would be a home run if the consumer returns to their old ways in the coming years, but it also presents a fair amount of risk if the recent shift in behavior remains indefinitely. We are skeptical of relying on the consumer right now, as credit remains tight and no job growth has yet occurred.