By  on April 14, 2010

Simon Property Group Inc. returned to the negotiating table Wednesday with a $2.5 billion offer to invest in rival General Growth Properties Inc. with a co-investor, the Paulson & Co. hedge fund.

Paulson committed $1 billion to the transaction. Simon’s new pitch is the latest salvo after being rebuffed in its $10 billion offer to purchase the bankrupt mall operator in February. Instead, General Growth teamed up with Canadian real estate firm Brookfield Asset Management for a $2.63 billion investment to help it exit bankruptcy proceedings, not unlike the proposition floated by SPG Wednesday.

The Brookfield plan splits General Growth into two divisions, giving Brookfield a 30 percent stake in the number-two U.S. mall operator. Shareholders would receive one share of new General Growth common stock at $10 a share, plus one share of a new entity, General Growth Opportunities, at $5 a share. General Growth Properties would retain the core mall assets and General Growth Opportunities would own certain noncore assets, which the mall operator said would include its “master planned communities and landmark developments like South Street Seaport” in lower Manhattan.

Brookfield would get warrants for acting as the “stalking horse” in helping General Growth Properties raise capital to exit bankruptcy, as would the co-sponsors, activist investor William Ackman’s Pershing Square Capital Management and Fairholme Capital Management.

Simon Property said Wednesday its plan is along the lines of Brookfield’s, with Simon essentially replacing Brookfield as the stalking horse. There is one significant change: Simon’s offer would do away with equity dilution through the issuance of warrants, which Simon estimated has a total value of $895 million.

Simon could come back with a takeover proposal later on. A GGP spokeswoman said, “GGP and our board of directors, together with our legal and financial advisers, will study the proposal consistent with our fiduciary duties.”

Craig Guttenplan and Rob Haines, analysts at CreditSights, said in a research note that Simon’s shift in approach from takeover to a recapitalization seems “designed to avoid the uncertainty associated with potential antitrust issues that could scuttle a combination of the two largest U.S. regional mall owners.”

The analysts said the revised Simon offer at $10 a share, $1 more than its previous one, would give it a two-thirds stake in General Growth Properties’ equity and reinstate about $1.5 billion of the company’s unsecured debt, reducing the amount of cash needed for the transaction.

General Growth returns to bankruptcy court on April 29 to determine “stalking horse” status.

In New York Stock Exchange trading Wednesday, Simon shares fell 23 cents, or 0.3 percent, to $87.95. General Growth’s stock was up 23 cents, or 1.4 percent, to $16.38.

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