NEW YORK Simon Property Group Inc sought to pluck General Growth Properties out of bankruptcy on Tuesday, offering to pay $7 billion to creditors and nearly $3 billion to shareholders in a deal that would combine the two largest U.S. shopping mall owners.
The offer, backed by General Growth's committee of unsecured creditors, is a preemptive strike, coming just a week before a bankruptcy court hearing where General Growth is scheduled to ask for more time to offer its own plan for emerging from bankruptcy.
By making the offer public, Simon appears to be trying to pressure General Growth to negotiate.
"The game has begun," said Jim Sullivan, Green Street Advisors Inc managing director.
Under Simon's offer, the unsecured creditors -- General Growth bondholders, the lenders under its credit facilities and the holders of its trust preferred securities, its exchangeable senior notes and its bonds from the acquisition of Rouse Cos -- would all receive full recovery plus accrued interest and dividends.
"Full cash payment to all unsecured creditors and the substantial recovery for equity bond holders that Simon has proposed would be a great result," Michael Stamer, counsel for the unsecured creditors committee, said in a statement.
The deal calls for General Growth's equity holders to receive $6 per share, or roughly $1.9 billion. It plans to spin off to shareholders the master-planned communities General Growth owns, for about $3 per share.
Simon said it is also prepared to pay stock to holders of equity or bonds for either all or part of their payments.
General Growth, who declined to comment, has refused to negotiate, Simon said.
"We have not received a substantive response to this offer from GGP or its advisers, nor any indication that you are prepared to enter into serious discussion so as to make our offer available to your shareholders and creditors," Simon wrote in a February 16 letter to General Growth's board of directors.
The Simon offer shows that investor appetites are growing for properties that generate cash.
"There's money ready and willing to act and to jump in and buy assets, now that they're starting to believe or sensing that it may not get any cheaper," said Robert Gadsden, a portfolio manager with Alpine Woods Capital Investors, which has shares in Simon and General Growth.
One believer in the prospects for General Growth has been fund manager William Ackman of Pershing Square Capital, who has argued the company's stock is worth $24 to $43 a share. Ackman, who controls 25 percent of the General Growth shares and who is on the board, was not immediately available for comment.
General Growth stock jumped 28 percent to $12.02 on Tuesday.
Simon, the biggest U.S. mall operator, may not be the only suitor. Brookfield Asset Management, which has been buying up General Growth unsecured debt, also has expressed an interest in General Growth, the No. 2 mall landlord.
"Simon has taken their first shot" at trying to win General Growth, Sullivan of Green Street Advisors said. "This sets up a very interesting series of decision and events going forward involving Simon, involving General Growth, involving Brookfield and involving anyone else out there who wants to own this portfolio."
Brookfield spokesman Denis Couture declined to comment.
Chicago-based General Growth, which owns such valuable properties as South Street Seaport in New York and Fashion Show in Las Vegas, did not immediately return a call for a comment. It has previously said that it prefers to emerge as a stand-alone company.
Any deal would have to be approved by the bankruptcy court.
Indianapolis-based Simon owns or has an interest in more than 300 properties in North America, Europe and Asia. These include such well-trafficked malls as Roosevelt Field on New York's Long Island and Sawgrass Mills Circle near Fort Lauderdale, Florida.
A successful deal by Simon would give it 40 percent of the U.S. regional mall market, Stifel Nicolaus has estimated.
Simon says it plans to finance the deal with cash on hand, existing credit facilities and by bringing in institutional investors for joint ventures on some of the properties. At the end of the year, Simon had $4.3 billion of cash on hand and $3.1 billion available under its corporate credit facility.
General Growth filed for Chapter 11 protection in April in the biggest real estate bankruptcy in U.S. history. The company was weighed down by debt from its 2004 acquisition of Rouse Cos, which brought it top-quality malls as well as Rouse's master-planned community business.
Rouse's 5.375 percent notes due in 2013 rose to 105.25 cents on the dollar on Tuesday, yielding 3.9 percent, versus 101 cents on Thursday, the last, most significant trade, when those bonds yielded 5 percent, MarketAxess data showed.
Simon's bonds, which are investment grade, fell slightly as the yield relative to Treasuries were up 7 percent. General Growth's bonds were not active.
Lazard Ltd, JPMorgan and Morgan Stanley are financial advisers to Simon. Wachtell, Lipton, Rosen & Katz is legal adviser.
Simon shares closed 3.9 percent higher at $74.82 on the New York Stock Exchange.
(Reporting by Helen Chernikoff and Ilaina Jonas; additional reporting by Dan Wilchins and Dena Aubin; Editing by Lisa Von Ahn, Gerald E. McCormick, Matthew Lewis, Gary Hill)