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General Growth Properties Plans to Exit Bankruptcy by Splitting Company in Half
Here are the plan's highlights:
- New company would be called General Growth Opportunities
- Toronto-Based Brookfield Asset Management Inc. would be largest shareholder.
- Brookfield kicking in total $2.63 billion.
- Brookfield pledges to buy 30% of new GGP company's shares at $10 per share for roughly $2.5 billion.
- Controversial corporate activist and General Growth shareholder William Ackman drafts novel breakup plan.
- New company would be nation's second largest mall owner after Simon Property Group.
- New General Growth plan would reject Simon's previous $10 billion, all-cash bid to buy GGP.
- General Growth shareholders will get higher return with new plan than with Simon offer, GGP executives expected to tell them.
- Brookfield values GGP at $4.5 billion versus Simon's value of $3 billion.
(CHICAGO, IL) -- Today is the day the nation's retail real estate community has been waiting for.
General Growth Properties, in Chapter 11 for 10 months, is expected to announce a novel corporate re-building plan that would split the current company in half and help it to exit bankruptcy court protection by this summer.
The General Growth board met Wednesday morning to review the plan.
The Wall Street Journal reports company executives and their advisers held a conference call with unsecured creditors later in the morning to walk them through the plan as well.
Please see related Real Estate Channel postings:
- General Growth Not Biting at Simon's $10 Billion Apple, Feb. 17, 2010
- General Growth's Fresh Funding Lifts 96 Properties Out of Bankruptcy Protection With 16 Left to Save, Jan. 25, 2010
- General Growth's Chapter 11 Filing Called Largest in U.S. Retail Bankruptcy History, April 17, 2009
- General Growth Properties Stock Price Rise Puzzles Wall Street, April 7, 2009
- Fourth General Growth Properties Mall Seized, March 23, 2009
- General Growth Wins Breather but Hedge Fund Manager Predicts Bankruptcy Filing Coming, March 17, 2009
- Clock Ticking on Bankruptcy-Saving Deal for General Growth Properties and Subsidiary, March 12, 2009
- General Growth Properties' Piggy Bank is Low as Debt Piles Up, Feb. 24, 2009
- General Growth Properties Dumps 3 Trophy Retail Centers in Public Marketplace, Dec. 22, 2008
The Wall Street Journal and other financial sources report that Toronto-based Brookfield Asset Management Inc., boasting one of the world's strongest balance sheets, will kick in $2.63 billion to become General Growth's largest shareholder.
(Brookfield is publicly listed on the NYSE, TSX and Euronext Amsterdam under the symbol BAM, BAM.A and BAMA, respectively. General Growth is listed as Pink OTC: GGWPQ. Simon Property Group is NYSE: SPG)
The new company would be called General Growth Opportunities.
Industry sources familiar with the breakup plan tell the WSJ General Growth and Brookfield envision the split creating both a company that owns nearly 200 high-quality malls and a smaller company with riskier holdings that appeal to investors willing to gamble for higher returns.
The complicated plan, drafted partly by activist investor and General Growth board member William Ackman, is meant to top a $10 billion buyout bid that rival mall owner Simon Property Group Inc. made last week.
The WSJ reports General Growth will argue that its plan, which is dependent on selling additional stock, offers its creditors more value than Simon's all-cash offer.
If General Growth's creditors and a bankruptcy judge approve the plan, General Growth would then sell additional new shares in the larger company in the coming months to raise capital for paying some of its debts.
If General Growth splits, the larger of the companies, which will retain the General Growth Properties name, would hold 170 to 180 of the company's more than 200 malls, according to people familiar with the plan.
Brookfield has pledged to buy 30% of that company's shares at a price of $10 per share for roughly $2.5 billion.
The smaller company, called General Growth Opportunities, would include many of General Growth's struggling or less valuable assets, sources tell the WSJ.
Those include roughly 28 malls, including several that General Growth had considered forfeiting to lenders because they are worth less than their mortgage balances.
It also includes General Growth's residential-development division, parcels of raw land and its headquarters building in Chicago.
The Brookfield plan values General Growth at $15 per share, but unlike Simon's all-cash buyout offer, it relies heavily on selling massive amounts of new stock in the coming months.
David Simon
The Brookfield plan values General Growth at about $4.5 billion in equity value, compared with $3 billion from Simon.
But Simon CEO David Simon is offering creditors more cash over stock and also has been cutting deals with Blackstone Group LP and other deep-pocketed partners in case it decides to raise its bid.
Both plans would repay the company's $7 billion in debt, though the General Growth plan would likely convert some of that debt into stock, said these people.
The smaller company would be spun off to General Growth's shareholders, with Brookfield buying 7% of its shares at roughly $5 per share, or $125 million in total.
General Growth's deal with Brookfield today comes just one week prior to a pivotal hearing in its bankruptcy case.
On March 3, U.S. Bankruptcy Judge Allan Gropper will decide whether General Growth's exclusivity period in its case will be extended by up to six months.
During that period, only the board of the bankrupt company can propose plans to the judge for restructuring and exiting bankruptcy. When exclusivity expires, creditors and outside parties can make proposals.
If the judge grants General Growth an extension, the company will move ahead with selling additional new stock to raise capital for its exit.
Sources in a position to know tell the WSJ the General Growth-Brookfield plan will face sharp criticism from Simon, which has offered to buy the entirety of General Growth for $10 billion.
Under its plan, Simon would pay off in cash General Growth's $7 billion in debt to its unsecured creditors, winning Simon support from creditors who prefer to receive cash as payment rather than General Growth stock.
In addition, Simon would pay roughly $3 billion to General Growth's shareholders, including $6 per share paid in cash and an estimated $3 per share in value if Simon were to spin off General Growth's residential-development division to those shareholders.
While Simon's bid values General Growth's equity at $9 per share and the Brookfield plan essentially values it at $15, a major difference for creditors in the bankruptcy case will be that Simon's plan offers to pay them entirely in cash, if they so choose.
In contrast, the Brookfield plan relies on selling additional General Growth stock to pay debts and convincing some unsecured creditors to convert their claims to stock.
To help finance its bid, Simon lined up partners including Blackstone and sovereign-wealth funds.
On its own, Simon has $4 billion of cash and $3.5 billion of borrowing capacity. Yet Simon ultimately might structure its bid as a joint venture in which it owns half and its partners own half, especially if it eventually must sweeten the bid, people familiar with the matter tell the WSJ.
Attention now will turn to whether Simon will increase its offer or perhaps risk missing the opportunity to purchase its next largest rival at a fraction of the price it would have fetched in past years.
The WSJ reports that doesn't mean Simon must match or exceed the Brookfield offer or General Growth's current share price, which finished Tuesday at $12.97, up 21 cents, in 4 p.m. trading on the Pink Sheets over-the-counter exchange. Some see the stock as somewhat inflated at this point by takeover hype.
Kevin Starke
Kevin Starke, an analyst with CRT Capital LLC, estimates that Simon can justify paying as much as $16 a share for General Growth, based on General Growth's estimated asset value and cash flow.
One advantage Simon has over Brookfield is that, as the largest U.S. mall owner, Simon can wring cost savings out of General Growth that Brookfield couldn't.
"In other words, Simon can recoup some of its outlay by cutting duplicated corporate jobs and perhaps combining other staffs," according to the WSJ.
"If there's another bid, [Simon is] going to be forced to raise their bid," said Jim Sullivan, an analyst with Green Street Advisors Inc., prior to the Brookfield bid's unveiling.
"But they have the strategic advantage in being in the mall business, which allows them to bid more. They have a very strong balance sheet. But someone has to prompt them to bid more."
General Growth sought bankruptcy last April after failing to refinance portions of its $27 billion debt load as they came due.
If Simon's bid were to prevail, Simon would pay off General Growth's $7 billion in unsecured debts and assume the $20 billion in mortgages on its malls, likely selling some of those assets to recoup some of its outlay for the purchase.
Ultimately, the judge might allow General Growth's creditors to vote on either the Simon or Brookfield plans, according to the WSJ.
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