The Brookfield Boys (BAM/BPO) come through for me…
Canadian property giant Brookfield Asset Management Inc. is readying a bid to take a large stake in U.S. mall owner General Growth Properties Inc., according to several people familiar with the matter, aiming to top an unsolicited bid made last week by mall rival Simon Property Group Inc.
Brookfield’s planned bid, which could be unveiled as soon as this week, would allow General Growth to exit Chapter 11 bankruptcy proceedings as a standalone company, with Brookfield as its largest shareholder, these people said.
The Simon bid values General Growth equity at about $3 billion, or about $9 a share. Simon would also pay off in cash the company’s unsecured creditors, who hold $7 billion in debt, valuing General Growth at around $10 billion.
Brookfield’s plan, while still being worked out, would value General Growth equity at a little more than $3 billion, the people familiar with the matter said. Unsecured creditors, however, would have to accept equity in General Growth, along with some cash.
The plan would make Brookfield the largest buyer in a massive stock sale General Growth intends to make to raise capital for emerging from bankruptcy court. Brookfield would invest at least $2 billion, these people said, though some of that would likely include forgiving General Growth debt currently held by Brookfield.
The size of Brookfield’s proposed ownership stake and the value it will attach to General Growth couldn’t be learned.
Brookfield, which has been readying a bid for some time, has lined up a consortium of other investors, many of whom are already General Growth debt holders, said people familiar with the matter. They didn’t identify those investors. “It is a friendlier, more consensual deal from the General Growth point of view,” one of the people said.
The ultimate amount of stock that General Growth would sell hasn’t been determined. Brookfield wants to be a “substantial investor in the company,” said a person familiar with the situation, with an eye toward operating General Growth and expanding it.
In rejecting Simon’s bid last week, General Growth executives said they intended to look into all options for exiting bankruptcy, including soliciting other buyout bids and selling stock to raise money for paying debts.
A spokesman for Simon said its bid was the better option for General Growth. “Simon’s firm, fully financed $10 billion offer provides immediate 100% cash recovery of par value plus accrued interest and dividends to all unsecured creditors, plus more than $9 per share in value to shareholders. It is the only offer which provides a full cash recovery for unsecured creditors while reducing risk and providing potential upside,” the spokesman said.
Chicago-based General Growth sought Chapter 11 bankruptcy last April after failing to refinance portions of its $27 billion debt as they came due. The competing efforts of Brookfield and Simon come ahead of a key March 3 hearing in its bankruptcy case.
At the hearing, U.S. Bankruptcy Judge Allan Gropper is to decide whether and by how much to extend General Growth’s exclusivity period. During that period, only the company’s board can propose plans for exiting bankruptcy. Once the period expires, creditors and outside parties can do so.
Brookfield’s plan is likely to get mixed reactions from General Growth’s creditors. It is unlikely that General Growth’s stock sale will raise as much as $7 billion and that all of that money would be used to pay unsecured debt. Thus, General Growth’s strategy is likely to call for paying part of its creditors’ claims in cash and the balance in stock, people familiar with the matter said. That would appeal to creditors who wanted the potential to reap more than what they are owed if the stock rises.
Simon, based in Indianapolis, has offered to pay the unsecured claims entirely in cash. That appeals to some creditors who want to immediately settle their claims and prefer not to gamble on the stock rising.
Further complicating matters: Brookfield last year bought roughly $1 billion of General Growth’s unsecured debt, giving it a voice among General Growth’s creditors. Simon, too, has bought some of the debt, but how much isn’t known. Brookfield is being advised on its bid by Goldman Sachs Group and law firm Willke, Farr & Gallagher, people familiar with the matter said.
The unsecured creditors will be one of many constituencies the judge weighs when he determines which plan best suits all of General Growth’s creditors and shareholders. It remained unclear whether the judge would allow a Brookfield plan to compete with Simon’s offer, since it wouldn’t pay unsecured creditors in cash. But if enough creditors preferred getting a chunk of stock instead of cash, Brookfield could attempt to seek enough votes to confirm the plan, assuming the judge allows creditors to vote on it.
Toronto-based Brookfield manages more than $98 billion in assets, specializing in infrastructure, power plants and commercial property. It has long coveted retail property in the U.S., having made a failed bid for discount-mall owner Mills Corp. in 2007. And It bid unsuccessfully to provide General Growth with emergency financing when the mall owner sought bankruptcy last year.
In the past year, Brookfield has raised roughly $5 billion, mostly from institutional real estate investors contributing to its newly created fund for making acquisitions.
So, where are?
Let’s run some numbers. SPG’s bid values GGP common at $2.7B or $9 a share. According to the article, BAM would top that in excess of $3B. A $3.25B bid brings the equity to $10.35. $3.5B takes it to just over $11….. Not enough…
Don’t worry though, still find it hard to believe our 50% owner (management) take a lowball equity offer.
Now of course the devil is in the details, right? The Simon bid is $10B with unsecured getting paid in cash. Even if BAM matches the offer but rather than paying unsecured on cash convert 50% of them to common, now we have a wholly different scenario depending of course on what the conversion rate is.
Now, some things to consider. How likely are unsecured creditors to convert? Very. BAM has >$1B of unsecured debt, Bruce Berkowitz and Fairholme (FAIRX) have over $500m and Bill Ackman and Pershing have a chunk. All have said they want to convert that debt to equity. Other creditors not cash strapped will also tend to convert as it gives them substantial upside to a debt position that now is essentially capped at the annual interest payment (roughly 6% based on outstanding debt).
So, if that is true (it is), BAM already has the support of a substantial block of unsecured the creditors. It is also true that this is a friendly block of creditors and that will weight on the Judge March 3rd when he decides whether or not to extend GGP’s exclusivity period. Any potential equity valuation by a group working WITH management will be given more bearing than a hostile bid from a direct competitor despite whatever David Simon may be saying publicly. Because of all this and because ending the exclusivity period now would through the whole process into chaos, I see very little chance GGP is denied its request given the substantial progress made to date.
Where does that leave SPG? Unless they can get a Blackstone (BX) or someone else to join their bid, they are out as they simply do not have the firepower/willingness to work with management the Brookfield Boys have.
My bet is they do get some help and then try to top their original bid and whatever BAM lays out. They’ll need help in whatever they do….
What has been missed by the general investing public here is that this is one of those unique Chapter 11’s in which the common shareholders, for the most part actually control the process. Usually being the bottom feeders in the payout line, common holder are left in the cold. But, since both secured and unsecured holders are getting made whole, the wants of common shareholders actually matter now.
When you add the fact that 50% of the equity is held by those actually submitting the reorganization plan, one can be assured common shareholders will have their voice heard.
Will have more on StockTwits TV Tuesday at 8:30 pm as events unfold tomorrow…