By and and  on February 16, 2010

Simon Property Group Inc.’s $10 billion offer on Tuesday to acquire General Growth Properties Inc. as the rival shopping center owner tries to emerge from Chapter 11 bankruptcy protection could have far-reaching implications if it succeeds.

The deal would combine the two largest mall owners in the U.S. with a total of 550 properties and more than 450 million square feet of leasing space.

Simon outlined its offer in a letter to General Growth’s board last week and said it decided to go public with its bid when General Growth didn’t respond.

On Tuesday night, Chicago-based General Growth released a letter reacting to Simon’s “unsolicited indication of interest to acquire” the company.

“We and our board of directors…have concluded based on discussions with other interested parties that it is not sufficient to preempt the process we are undertaking to explore all avenues to emerge from Chapter 11 and maximize value for all the company’s stakeholders,” the letter said.

General Growth, which is based in Indianapolis, invited Simon to participate in the exploration of restructuring alternatives set to begin in early March. “GGP is committed to fully exploring all potential options available to the company,” the letter said. “These alternatives include a stand-alone restructuring funded with institutional equity capital as well as potential business combinations. We would expect to receive indications of interest within four weeks of the launch of the process.”

Simon’s trophy properties include The Forum Shops at Caesars Palace in Las Vegas, Copley Place in Boston and King of Prussia mall in King of Prussia, Pa. General Growth’s marquee centers include Tysons Galleria in McLean, Va.; the Grand Canal Shops at the Venetian in Las Vegas, and Water Tower Place in Chicago.

A key player in the drama is activist shareholder William Ackman, whose Pershing Square Capital Management is one of the biggest stakeholders in General Growth, with both equity and debt.

Ackman said in December he believes General Growth is worth at least $24 a share based on a comparison with publicly traded competitors.

Ackman, who holds a seat on General Growth’s board, said in a December investment letter, “Once GGP has extended the substantial majority of its secured debts, the company will be well positioned to emerge as an independent company. We believe the stock trades at a substantially lower valuation than Simon Property Group because many market participants and analysts have incorrectly assumed that GGP’s unsecured creditors will meaningfully dilute shareholders’ ability to achieve a substantial recovery.”

Ackman could not be reached for comment.

General Growth in April filed the biggest real estate bankruptcy in U.S. history with a crushing $27 billion debt load.

Simon’s offer would provide a 100 percent cash recovery plus accrued interest and dividends for all of General Growth’s unsecured creditors, the holders of its trust preferred securities, lenders under its credit facility, holders of its exchangeable senior notes and holders of bonds related to its acquisition of the Rouse Co.

Simon said Tuesday General Growth’s unsecured creditors support the deal. General Growth has about $7 billion in unsecured debt.

General Growth shareholders would get more than $9 a share, including $6 in cash. Simon said it is also prepared to offer its own stock instead of cash as payment to General Growth shareholders.

Under Simon’s offer, the existing secured debt on General Growth’s portfolio of assets would remain in place. The offer requires the approval of General Growth’s board, creditors and the bankruptcy judge overseeing the case. General Growth last month hired UBS as its investment adviser.

Investors on Tuesday bid up the price of General Growth shares by 27.9 percent, or $2.62, to close at $12.02 in over-the-counter trading. More than 15.9 million shares traded compared with an average volume of 3.4 million.

The offer of $9 a share and the closing price of General Growth stock suggests investors are expecting a sweetened offer from Simon.

Experts said should the bid succeed, Simon might cherry-pick the General Growth portfolio, keeping the best properties for itself, and seek to sell secondary properties.

“When you start looking at a portfolio like General Growth, it’s a once-in-a-lifetime opportunity,” said Andy Graiser, co-president and chief executive officer of DJM Realty. “These opportunities don’t come around often. The Class A malls are the one thing that seems to be doing well in a tough market.”

Rich Moore, real estate analyst at RBC Capital Markets, said the offer is “something that we’ve been anticipating for a long time, but the credit crisis made it hard for Simon to put a bid together.” If the deal comes to fruition, “it would mean that Simon gets the pick of the [retail] crop. It would change the dynamic in that sense.”

Simon is known as a tough landlord that is said to try to get stores seeking space in top properties to also lease space in less desirable shopping centers. Experts also give Simon high marks for the marketing of its centers.

By acquiring General Growth, Simon could have even greater clout in setting rents and terms and conditions of leases, such as duration, as well as granting tenant improvement allowances.

“Locations will become critical,” a real estate source said. “If Simon controls more real estate, they can play hardball.”

In response to concerns about its size and clout, Les Morris, a Simon spokesman, said: “We believe that the retail industry is incredibly dynamic and competitive. Given the number of brick-and-mortar retail projects of all kinds and the continuing growth in Internet retailing sites and concepts, retailers have a multitude of options to choose from in deciding how and where to sell their merchandise.

“Our investments represent only a fraction of the many retail shopping venues and require that we provide retailers an attractive alternative,” Morris said. “That is why we are committed to making all of our retail projects, regardless of size or type, attractive and exciting venues that appeal both to consumers and retail clients.”

Brookfield Asset Management, a Canadian real estate firm that holds $1 billion of General Growth’s unsecured debt, is said to be considering a cash infusion to General Growth that would allow the company to emerge from bankruptcy as a stand-alone entity with Brookfield as a major shareholder.

Simon appears to be the only REIT with the wherewithal to bid for General Growth. While there are big institutional players with cash and foreign investors, sources said if one of them were to make a move, it would have done so by now. “There’s not a lot of REITs sitting around with that kind of cash,” said an acquisitions expert. “Most of them are wounded children themselves.”

Simon in December agreed to buy Prime Outlets in a deal worth $2.4 billion. According to CreditSights analysts Craig Guttenplan and Rob Haines, the proposed General Growth transaction makes strategic sense, but Simon Property’s offer “may have negative implications for its credit profile, depending on how much capital its financial partners are willing to commit.”

Shares of Simon Property rose 3.9 percent, or $2.82, to close at $74.82 in trading on the New York Stock Exchange following news of its offer for General Growth.

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