Simon Property Group Inc. teamed up with hedge fund Paulson & Co. to try to unseat Brookfield Asset Management Inc. as the key investor in General Growth Properties Inc., throwing a curveball into the contest for the No. 2 U.S. mall owner.
The proposal would see Simon invest $2.5-billion (U.S.) to help General Growth exit bankruptcy. More importantly, it would not take any warrants to buy shares the way that Brookfield and other investors would under General Growth's current plan.
Paulson, the $32-billion hedge fund run by billionaire investor John Paulson, has made a commitment to invest another $1-billion with Simon.
The offer now puts the ball back in General Growth's court. If Simon's plan indeed gives General Growth and its shareholders access to cheaper funding, it could be difficult to convince a U.S. Bankruptcy Court judge of the merits of sticking with Brookfield.
It also puts Brookfield on the spot.
Simon's latest move would give it more time to make another takeover offer for General Growth, in which it still remains interested, as it works out issues like antitrust concerns.
But Simon, the largest U.S. mall owner and the largest U.S. real estate investment trust, must still persuade General Growth that its offer is better than Brookfield's and have the bankrupt company submit a new deal in court to emerge from Chapter 11.
Replacing Brookfield as a cornerstone investor in General Growth's proposal will take the warrants off the table, making it more expensive to top Simon's bid. General Growth has asked the court to approve the warrants, worth several hundred million dollars. A hearing is scheduled for April 29.
The deal would give Simon a stake of 20 to 25 per cent in General Growth, a source familiar with the offer said.
Simon could appeal to General Growth constituencies. Equity holders, for example, would benefit if investors do not receive warrants that would dilute their returns.
"The equity interest should find that appealing to the extent that it eliminates warrants and the Brookfield break-up fee," another source familiar with the offer said.
Simon estimated that equity holders could gain at least $895-million, or $2.75 per share, without the warrants.
Under Brookfield's deal with General Growth, the Canadian company will receive warrants to buy 60 million shares in return for its commitment to invest $2.63-billion.
Two other investors who are partnered with Brookfield - Fairholme Capital Management and William Ackman's Pershing Square Capital - have offered another $3.9-billion to General Growth to help it exit bankruptcy as a stand-alone company. In return, those investors would receive warrants for 60 million shares between them.
Simon's new offer asks Fairholme and Pershing to join it and forgo the warrants, or Simon has sources to replace them, too.
Simon's move is "a very shrewd counter offer," Sandler O'Neill analyst Alex Goldfarb said. "It forces Brookfield's hand. Brookfield either now has to pay up to retain the warrants. If they do, the question is, do Pershing and Fairholme also increase their offer to stay with BAM or do they say, 'Let's join the Simon consortium?"' Simon said that under its latest offer, the Fairholme-Pershing group could still invest with it if they forgo the warrants. It also plans to talk to Elliott Management, which had been working with Paulson on a deal to replace Fairholme-Pershing, the source said.
Simon said a number of other entities were interested in investing with it in place of the Fairholme-Pershing group. The source said additional funding could come from sovereign wealth funds and other foreign investors.
A General Growth spokesman was not immediately available for comment. Representatives from Fairholme, Pershing and Elliott were not immediately for a comment.
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