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US Retailers “Concerned” Over Possible GGP/SPG Combination $$

Not matter what David Simon says, this IS going to be an issue

From the WSJ:

National retailers are expressing growing concern that mall giant Simon Property Group Inc. may gain too much market power if it succeeds in acquiring rival General Growth Properties Inc. out of a bankruptcy proceeding.

The concern raises the possibility that the deal might face antitrust criticism from retailers and others. The combined entity would own roughly half of the 300 U.S. malls with the highest sales, according to estimates by Green Street Advisors Inc.

Many retailers have been unwilling to publicly criticize the proposed deal, partly because Simon already is the country’s largest mall owner. But officials with the National Retail Federation, the largest trade association for U.S. retailers, say large members have complained to the trade group that the deal would give Simon so much market clout that it could dictate higher rents and sway store openings and closings.

“Most folks are concerned about increased concentration of market power,” said Mallory Duncan, the trade group’s general counsel. “When costs [and rents] go up, prices to our customers go up. When you reduce competition in a market by increasing consolidation of market power, that’s not good generally for our members or their customers.”

The retail federation, which represents roughly 2,000 retailers, including those with hundreds of stores in malls, such as Gap Inc. and Foot Locker Inc., hasn’t taken a position on Simon’s bid for General Growth. Mr. Duncan declined to identify which retailers have complained.

Simon Chairman and Chief Executive David Simon has argued since making his bid for General Growth that the combined company wouldn’t run afoul of antitrust laws. He has noted that the competitive field for malls is much broader than just other malls.

“Retail real estate is so diverse,” Mr. Simon said Tuesday at a Citigroup Inc. conference in Palm Beach, Fla. “There are so many options for retailers. We’re competing with the Internet. We have Wal-Mart, big-box retailers, department stores” as competition.

On Friday, a Simon representative said a combined Simon-General Growth couldn’t arbitrarily raise rents. “Rents are determined by the quality of the real estate, not who owns it,” he said.

Retailers’ concerns about a Simon-General Growth deal are a bit preliminary because no deal has been struck. And, if Simon prevails, it might keep the malls it most covets and divest itself of dozens of others, perhaps defusing antitrust arguments. But as General Growth’s board weighs the Simon bid and others, the odds of antitrust issues with a given deal likely will be among the factors it ponders.

General Growth intends to solicit other buyout and recapitalization bids in the next two months to consider along with Simon’s as it charts its preferred course for exiting from bankruptcy later this year. Canadian property investor Brookfield Asset Management Inc. has offered to contribute capital to help General Growth emerge as a stand-alone company in exchange for an ownership stake.

Simon, based in Indianapolis, is the largest U.S. retail landlord with 321 properties, including enclosed malls, big-box centers and smaller shopping centers. General Growth, based in Chicago, owns more than 200 U.S. malls.

Antitrust experts have said that a Simon-General Growth merger doesn’t seem to bring enough antitrust issues to derail such a deal. Antitrust law rarely is applied to real estate deals, some say. And, they say, Mr. Simon makes a compelling argument when he says that the market is broader than just malls.

Some retailers still fear the worst. “Our concern is the near monopoly in certain markets and, consequently, rents getting inflated,” said an executive at a national retailer with hundreds of locations who declined to be identified for fear of retaliation. “Broadly, retailers will be faced with a choice of paying an inflated rent and recouping that increased expense with higher prices or abandoning the mall.”

Does anyone know WHY this has not been an issue up until this point? Up until now, the US mall market has never seen the regional mall concentration it will see with a SPG/GGP combination. Those saying “it has never been an issue before” are correct only in that no one has ever proposed such monopolistic concentration before.

When the SPG spokesman says “Rents are determined by the quality of the real estate, not who owns it,” he is correct. But, when the “who owns it” is one person and they own all of “it” in a certain area (this would be the case in MA) then “who” most certainly does control the rents as retailers have no other options. Thus is the problem…

It is folly to assume something won’t happen “because it has never happened before”. If the last two years have taught us anything, unimaginable events not only happen, but when conditions are right for them, in hindsight are more than likely. Thus is SPG’s upcoming FTC issue IMO.

Think of this scenario. Imagine Dell and HP announcing a merger tomorrow. Combined they would own 47% of the US computer market. Is there anyone who would not expect the FTC to crawl all over it? A SPG/GGP combination would have more power in the regional mall market that HP/Dell would in the US computer market, yet, no one thinks the FTC will have an issue with it?

IF SPG wants in on the GGP deal, they are going to have to structure it like the current BAM deal in which they take a minority share OR bring in a partner that will take possession of certain assets post deal.

The fact the retailers are scared to publicly say anything ought t be a clue as to the potential power of the combined entity….