In a move expected to unleash a bidding war, the nation's biggest mall owner on Tuesday announced a $10 billion offer to acquire its top rival out of Chapter 11 bankruptcy proceedings.
Simon Property Group Inc. would control 550 regional malls in the country — a third of the market — if it wins its bid for General Growth Properties Inc. That's on top of the third of the country's 217 outlet malls Simon will control when a separate $700 million deal with Prime Outlets soon closes.
With experts fearful the troubled commercial real estate market will be the next shoe to drop in the mortgage lending meltdown, this mall mega-deal is a tale of the strong parlaying hard times to become an even more formidable force.
Locally, General Growth handles leasing for University Mall. Simon owns Tyrone and Gulf View Square malls in the Tampa Bay area and will own the area's biggest outlet mall in Ellenton when the deal for Prime Outlets is complete. Across other parts of Florida, and South Florida in particular, Simon and General Growth dominate the industry.
These two corporate elephants have engaged in a slow-motion faceoff since April when General Growth filed for bankruptcy protection, citing its inability to restructure $1.1 billion of $27 billion in ongoing debt obligations because of frozen credit markets. General Growth held several of its trophy malls out of the bankruptcy case to ensure it would not be forced to sell them. Those properties are not part of the Simon bid.
Three times since then, Simon has had little trouble raising cash in the public markets — $4 billion — to make acquisitions.
"The beauty of this deal is when it started, General Growth would have cost them $30 billion," said Matt Will, a finance professor at the University of Indianapolis. "Now they would get it for $10 billion and all the creditors and shareholders would get 100 percent of their money."
General Growth already persuaded a judge to restructure $15 billion in debt on 103 of its malls as part of a bankruptcy reorganization plan without Simon's help. Toronto-based Brookfield Asset Management also had jockeyed into a position to make a friendlier bid by buying $1 billion in General Growth debt.
"Our offer provides much needed certainty to conclude General Growth's protracted reorganization," said David Simon, chief executive of Simon Property. "We are in the unique position to offer creditors and shareholders full, fair and immediate value."
General Growth never responded to Simon's offer. So after a week, Simon made it public. Brookfield and other big real estate investors including Vornado Realty Trust are expected to bid, too.
The Simon bid would pay $7 billion in cash or Simon stock to unsecured creditors and $3 billion to pay General Growth shareholders $6 a share in cash or Simon stock. In addition, $3 a share would go to the heirs of Howard Hughes to settle lingering obligations from a massive Las Vegas housing development that flopped.
The major players include John Bucksbaum, founding patriarch of the Cedar Rapids, Iowa, family shopping mall empire that holds 23 percent of General Growth stock. On the General Growth board now is activist investor William Ackman, whose hedge fund bought 25 percent of General Growth shares when the stock traded below $2. Ackman argues Simon's $6-a-share offer is only a fraction of what the company and the earning power of its real estate is really worth.
Information from Times wires was used in this report. Mark Albright can be reached at firstname.lastname@example.org or (727) 893-8252.