Mall owner Simon Property makes $10B offer to buy General Growth out of bankruptcy

Simon Property offers General Growth $10B buyout

LOS ANGELES — Simon Property Group Inc., the nation’s largest shopping mall owner, made a $10 billion hostile bid Tuesday to acquire ailing rival General Growth Properties.

The acquisition would allow General Growth, the No. 2 owner of shopping centers, to emerge from Chapter 11 bankruptcy protection. General Growth filed for bankruptcy last year after buckling under the weight of billions in debt it racked up during a massive expansion effort fueled by cheap credit.

The move is Simon’s second attempt at a major acquisition in three months. In December, Simon offered $700 million in cash and stock to buy more than 60 outlet shopping centers from another competitor, Prime Outlets Acquisition Co. That deal is pending.

Simon is using its comfortable cash cushion and credit lines to take advantage of falling commercial property values, which are off 40 percent from their peak in 2007. And General Growth has some prized centers, including the Glendale Galleria in Southern California and the South Street Seaport in Manhattan.

Simon has been able to weather the economic downturn despite rising retail vacancy rates in the double-digits in some cities. The Indianapolis-based company popularized the so-called lifestyle center mall design that turned malls into neighborhood-like communities. Simon owns more than 380 properties, including the Houston Galleria and the Fashion Valley Mall in San Diego.

Many national retail companies have stores in regional malls like those that Simon and General Growth own. If Simon or another large mall operator were to acquire General Growth’s centers, that could give it more muscle to negotiate for higher rental rates with retailers

Under the terms of the offer, General Growth’s unsecured creditors would get $7 billion, which would pay them in full. Shareholders would receive $3 billion, or $6 a share in cash and $3 a share in other assets. The offer, however, might be amended so shareholders could receive Simon stock instead of cash.

“Simon’s offer provides the best possible outcome for all General Growth stakeholders,” said David Simon, chairman and CEO, in a statement.

Simon disclosed its offer after General Growth’s board failed to respond to a formal offer it made last week.

In a letter to General Growth’s board dated Feb. 8, Simon spelled out its offer and argued shareholders stand to gain more from a takeover than if General Growth emerged from bankruptcy as a standalone company, or accepted a rival bid.

“We are convinced that a transaction with Simon is superior to any proposal you may be considering,” Simon wrote in the letter, stressing the proposal was not open-ended.

In a letter to Simon disclosed by Chicago-based General Growth late Tuesday, the company essentially told Simon its offer wasn’t compelling enough to steer it off its plans to emerge from bankruptcy and explore a possible sale of the company or a bid to raise capital.

But General Growth wasn’t saying no, either.

The company said it plans to send out details on its financial projections next month to unnamed “participants” and invited Simon to remain part of the process.

Though the official committee for General Growth’s unsecured creditors has backed the deal, stockholders appeared to be looking for a sweeter offer from Simon or another competitor. Shares in General Growth shot up nearly 28 percent, or $2.62, to $12.02.

Simon shares rose $2.82 to close at $74.82.

Alexander Goldfarb, an analyst with Sandler O’Neill & Partners, said he expects other offers to drive the bidding higher.

“General Growth has a number of options,” Goldfarb said. “This is not the only one.”

Any offer, should it be accepted, would be a steal compared to what General Growth was worth in 2007. Back then, with shares trading above $60, General Growth had a market value of about $15 billion. At Tuesday’s closing price, the entire company was valued at about $3.8 billion.

But any new owner would have to deal with General Growth’s massive debts. The company racked up $27 billion in debt by the time it sought shelter from creditors last April, making it the largest real estate bankruptcy case in U.S. history.

In December, a bankruptcy court approved its plan to restructure $10.25 billion in debt. A plan for restructuring another $1.7 billion in debt is up for approval when some conditions are satisfied.

At the time, General Growth said it was considering “all indications of interest in the company.” That fueled speculation the mall operator was fielding offers.

Many real estate investment trusts are also flush with money, having raised $34.5 billion of new capital last year. Some traders are speculating Brookfield Asset Management could be among those interested in buying General Growth.

The company has been looking to expand its slate of retail properties and acquired a stake in General Growth last year. Brookfield hasn’t provided details but said the stake was “significant.” Published reports have suggested the Brookfield spent as much as $1 billion — something the company hasn’t confirmed or denied.

In 2006, Brookfield made a bid for shopping center owner Mills Corp. but was foiled by Simon.

Brookfield spokesman Denis Couture declined to comment Tuesday.

(This version CORRECTS to read that a combination could lead to ‘higher’ rates for retailers)