BOSTON When is $3 not necessarily worth $3? When it is the value assigned to General Growth Properties' GGWPQ.PK vast collection of residential real estate lots, mostly assembled by Howard Hughes in the 1950s.
Mall owner Simon Property Group (SPG.N) has made an unsolicited offer to acquire bankrupt competitor General Growth for $9 a share. That would consist of $6 in cash, plus a stake in a spinoff of General Growth's Maryland, Nevada and Texas residential developments that Simon valued at $3 per share.
But with the residential real estate market still hurting from the end of the mortgage-lending bubble, few analysts agree that stockholders would receive $3 a share of value in a spinoff of the land, mostly located around hard-hit Las Vegas.
"It's not worth anywhere near $3 a share," said analyst Jim Sullivan of Green Street Advisors, a top research firm covering real estate investment trusts.
Other analysts agree. In a report analyzing the takeover, David Fick of Stifel Nicolaus said there was little chance the land could sell "for anything close to that price." And Benjamin Yang of Keefe, Bruyette & Woods said the properties were likely to fetch a "lower consideration," given "tepid demand" for both residential and commercial real estate.
With investors already saying the equity portion of Simon's bid is too low, the land value shortfall means the mall operator may have to raise the $1.9 billion cash portion of its bid significantly to close a deal.
Simon is also offering to pay $7 billion to debtholders -- their full principal and accrued interest.
General Growth responded to Simon's offer with a letter saying it was exploring all possible alternatives to emerge from bankruptcy and would issue detailed information about the company and its properties to potential bidders in March.
General Growth and Simon did not immediately respond to requests for comment about the value of the real estate.
In a sign that investors are expecting a competing bid, shares of General Growth are trading at about $12.50, up from $9.40 before Simon announced its offer. One possible suitor is Brookfield Asset Management (BAMa.TO), which has been buying up General Growth debt, but the company declined to comment earlier this week.
Adding to the land value debate, an agreement predating General Growth's bankruptcy required the company at the end of 2009 to pay heirs to the fortune of Howard Hughes half the remaining value from developing land near Las Vegas known as Summerlin.
General Growth never made the final payment since it had filed for bankruptcy in April, and the two sides continue to squabble in court. On Tuesday, a federal judge in New York rejected a move by the Hughes heirs to remove Summerlin from properties General Growth put up to back its debtor-in-possession loans while it remains in Chapter 11.
The 22,500-acre Summerlin property, assembled by Hughes through purchases in the 1950s, once accounted for most of the value of General Growth's residential real estate portfolio.
PLUNGING HOME PRICES
Hedge fund managers on both sides of the General Growth investing debate for the past year have been contesting the value of the company's "Master Planned Community" unit, which was acquired in 2004 as part of the $14.3 billion takeover of Rouse Co.
But even the most bullish General Growth shareholders, including hedge fund manager Bill Ackman, have conceded that the residential real estate may be worth far less than the $3.3 billion, or $10 a share, that General Growth estimated at the end of 2007.
In Ackman's May 2009 presentation laying out his case for buying General Growth shares, he estimated that the MPC unit was worth between 27 cents and $6.72 per share, excluding any payments required to the Hughes family.
Median home prices around Las Vegas, one of the areas hit hardest by the end of the real estate bubble, dropped 22 percent in 2009 and are off about 60 percent since peaking in 2007. The foreclosure rate on all outstanding mortgage loans in the area topped 8.5 percent in December, almost triple the national average.
More-bearish investors have provided even lower estimates. Eric Hovde, a hedge fund manager who is shorting General Growth shares, has issued three analyses of the company, estimating its residential real estate is worthless.
"There is little if any value in the master planned community business," Hovde wrote in a December 29 analysis, "given the purchase of these assets was near what we view as peak prices and the subsequent decline in land prices."
(Reporting by Aaron Pressman; Editing by Lisa Von Ahn)