Brookfield Asset Management Inc.'s opponent in the battle for what the Canadian conglomerate calls "one of the great real estate value opportunities currently available" is refusing to back down, even after being snubbed.
Simon Property Group Inc.'s latest move in the chess game to win a big stake in U.S. mall owner General Growth Properties is a sly bid that mirrors Brookfield's rival offer in most every way, except it drops a costly condition.
Simon said it would invest $2.5-billion (U.S.) in General Growth, which is reorganizing under protection from its creditor, and hedge fund Paulson & Co. would add another $1-billion. But the Simon group wouldn't ask for the warrants that the Brookfield plan seeks. Simon chief executive officer David Simon, in a letter to General Growth, said that would be a benefit worth about $895-million to General Growth's shareholders, because it would mean no dilution from warrants that are exercised.
Brookfield has been General Growth's preferred partner from the beginning of the restructuring process. General Growth, the No. 2 U.S. mall owner, turned down a $10-billion Simon bid for the whole company in February, saying it wasn't enough.
For Brookfield, General Growth would provide not only a stake in a group of 200 malls with high sales and occupancy rates. It would be a first step in a potential larger expansion in U.S. retail real estate.
Even failure, however, would be profitable for Brookfield, which has a big stake in General Growth's debt. Those bonds have soared in value as it became clear the company was going to be worth a lot even in court protection. For example, the company's convertible bonds have jumped from less than five cents on the dollar in early 2009 to 103 cents on the dollar of late.
"If they [Brookfield]lose they drive on, nothing ventured nothing gained, and they'll probably have a nice score out of it because they bought the bonds at a discount," RBC Dominion Securities analyst Neil Downey said. If Brookfield is successful, it will only be at an acceptable price for the company, he said.
Brookfield has never officially revealed the size of its bond position, or the price it paid, but the company is believed to hold about $1-billion of General Growth's unsecured debt. Brookfield spokeswoman Katherine Vyse declined to comment on the Simon proposal or the bond holdings.
Despite Simon's new offer, there are still issues that could tip the balance toward Brookfield in the tussle for General Growth.
The biggest may be antitrust concerns. Combining General Growth and Simon, the two biggest mall owners in the U.S., would create a colossus that would own more than 500 shopping centres. Those concerns caused recent talks between the two companies to break down after the companies couldn't agree on a fix.
Under Simon's new proposal, the company said it would agree to limits on its influence that might help to alleviate antitrust issues. Simon also said it would be open to an alliance with two of the investors backing Brookfield, Pershing Square Capital Management and Fairholme Capital Management, as long as they waived their request for warrants.
Simon reiterated that it would also still be interested in talks aimed at an acquisition of all of General Growth.
The final decision will rest not only with the board of General Growth but with the judge overseeing the company's restructuring. The court has to choose the so-called stalking horse bid that all other players must beat. The next hearing in that process is set for April 28.