Sifting through the wreckage of the credit crunch, Brookfield Asset Management Inc. has snapped up office buildings, ports, railways and gas pipelines. Now at the top of its list: shopping malls throughout the United States.
For months, the Toronto-based property-and-infrastructure giant has pursued General Growth Properties Inc., the second-largest mall owner in the United States, which amassed a mountain of debt and filed last year for creditor protection. The discussions reached an advanced stage, people close to Brookfield said, before being jolted by a competing bid last week, sending the company back to the drawing board.
If Brookfield continues its pursuit and it proves successful, the deal would catapult the company to the forefront of the shopping centre business in North America, acquiring interests in iconic properties such as New York's South Street Seaport and Boston's Faneuil Hall Marketplace, among more than 200 others.
According to people close to Brookfield, the company has sought a foothold in U.S. shopping malls since 2006, when it first targeted another company and saw its bid trumped the following year.
In a case of déjà vu, Brookfield's competition is once again Simon Properties Inc., the largest mall owner in the United States, which is eager to grab General Growth for itself.
Brookfield was caught off guard by the Simon Properties bid, and sources said it is continuing discussions with its financial backers and General Growth's advisers about whether to proceed with a competing offer. Although Brookfield is an active buyer in the takeover arena, it has a history of walking away from the table when it decides the stakes are too rich.
The malls are the latest target in Brookfield's campaign to buy up troubled assets after emerging comparatively unscathed from the financial crisis.
Armed with a $5-billion war chest from pension funds, institutions investors and sovereign wealth funds, it is scouring the globe for property plays gone bad before prices start to rise.
Brookfield "understands that acquisitions of property in distress can become very lucrative when the cycle turns," said Kevin Starke, a senior vice-president at CRT Capital Group in Connecticut.
General Growth represents a unique opportunity for a potential acquirer, giving it access to some of the most highly trafficked malls in the country.
"It's not every day that you get a chance to look at a set of assets like that," says Mr. Starke.
Denis Couture, a Brookfield spokesman, had no comment on the company's intentions toward General Growth. According to a report in The Wall Street Journal, Brookfield's plan would see General Growth emerge from bankruptcy protection with Brookfield as its major shareholder, with the bid valuing General Growth's equity at a little over $3-billion (U.S.). Unsecured creditors would receive a mix of stock and cash.
Brookfield itself owns a substantial chunk of General Growth's debt, some of which it would likely forgive as part of a future transaction.
That has already proven to be a canny investment: In a letter to investors on Feb. 19, Brookfield chief executive officer Bruce Flatt wrote that the firm bought the debt when it was trading below par value. The debt now changes hands at par value, he noted.
Simon's unsolicited bid for General Growth last week values the company's equity at $3-billion, or about $9 a share, and would pay off unsecured creditors with $7-billion in cash. Investors regarded Simon's offer as the opening salvo in a bidding war that will likely see it raise its offering price.
This isn't the first time that Simon Properties and Brookfield have tangled over the course of an acquisition. In early 2007, Brookfield had nearly finalized an agreement to buy The Mills Corp. - another indebted U.S. mall operator - only to see its offer trumped when Simon Properties swooped in with a richer bid of $1.7-billion.
History has repeated itself with General Growth. According to people close to Brookfield, the Canadian holding company first targeted General Growth in 2008, correctly predicting that the financial crisis would squeeze the heavily indebted mall operator.
Brookfield began making takeover overtures to General Growth after the company filed for court protection from its creditors last April, one source said. It also began gathering a group of investors to finance a potential offer.
Brookfield often pockets huge returns even when it heads for the exits before the conclusion of a takeover battle: It typically invests in undervalued debt or equity, as it did with General Growth, which generates a profit when competing suitors bring forth their offers.
Brookfield is attempting to turn struggles at other firms to its advantage by adding them to its vast portfolio in anticipation of better economic times. In November, for instance, Brookfield bought a 40-per-cent stake in Babcock & Brown Infrastructure for $1.1-billion. The formerly high-flying Australian firm was sinking under a large debt load. In one fell swoop, Brookfield doubled its infrastructure holdings, picking up interests in an Australian coal terminal and Britain's third-largest port.