Pershing Sends Letter to GGP
- Posted by ToddSullivan
- on August 23rd, 2012
It’s been a while since we had some $GGP drama…….
The letter Pershing Letter to GGP (click to open):
Here is what this is about:
At present, Brookfield owns 38.2% percent of GGP’s outstanding stock and holds warrants on an additional 6.4% percent of the company (or approximately 42.2% including stock and warrants, assuming the exercise of its warrants).2 It has designated three of the nine directors on the company’s board, which is chaired by Bruce Flatt, Brookfield’s CEO. This high degree of ownership and board representation gives Brookfield enormous influence over GGP; yet Brookfield is not the controlling shareholder of GGP.
At the time that Brookfield negotiated the bankruptcy recapitalization with the GGP board under the supervision of the bankruptcy court, one of the most important considerations of the transaction and one of the most highly negotiated elements of the deal was GGP’s ensuring that the sale of stock and warrants to Brookfield did not represent a sale of control.
Not transferring control to Brookfield was critically important because GGP was selling stock and warrants to Brookfield at a price that did not reflect a control premium to GGP shareholders. Because control is an enormously valuable asset that is owned by GGP shareholders, the GGP board and the bankruptcy court endeavored to negotiate protections in its shareholder agreement with Brookfield to ensure that Brookfield did not obtain control at that time nor at any time in the future without it being required to pay an appropriate control premium.
At the time of Brookfield’s initial investment in the company, it owned 24.6% of the common shares then outstanding and warrants to purchase an additional 5.8% of the company (or approximately 29% including stock and warrants, assuming the exercise of its warrants).
Since the bankruptcy, Brookfield has acquired 113.3 million shares from Fairholme, GGP has repurchased 35.8 million shares, and Brookfield has received millions of additional shares as part of the company’s dividend reinvestment program without the company obtaining from Brookfield any agreement regarding its increasing voting power.
The effect of these transactions has been to increase Brookfield’s common stock ownership of GGP from 24.6% to 38.2%, which would increase to 42.2% if Brookfield exercised its warrants. Furthermore, each quarter that GGP pays a dividend, Brookfield’s stake in the company increases due to the dividend reinvestment program and the anti-dilution features of the warrants. The increase in Brookfield’s ownership has been accelerated as a result of the recent increase in the quarterly dividend.
The Brookfield warrant anti-dilution features protect the value of the warrants by increasing the number of shares underlying the warrants and reducing the strike price each time GGP pays a dividend or completes a spinoff or other distribution. The Brookfield warrants have already been adjusted to reflect dividends paid to date and an adjustment for the Rouse spinoff, thereby increasing the number of shares underlying Brookfield’s warrants from 5.8% to 6.4% of shares outstanding.
For each quarterly dividend paid in the future and in the event of any future spinoffs or other distributions, Brookfield’s ownership interest will increase further, and the warrant strike price will be adjusted downward. As a result of the dividends paid to date and the Rouse spinoff, the strike price of the Brookfield warrants has been reduced from $10.75 to $9.69.
In summary, Brookfield has gone from owning 29.0% of the company at emergence to 42.2% today. It is only a matter of time before Brookfield de facto controls the company. This inevitability is totally inconsistent with the intent of the parties at the time the original Brookfield investment was negotiated. More importantly, if control of the company is ceded to Brookfield, shareholders will suffer enormous and irreparable harm for they will lose the ability to capture an appropriate control premium for their shares.
It is wholly unfair that Brookfield has been given an effectively unlimited period of time to confidentially consider a transaction to acquire GGP while having access to perfect inside information, and while Brookfield’s ownership stake in the company increases with the payment of each quarterly dividend, further cementing its control of GGP. This is particularly true in light of the fact that Simon, currently the most likely buyer of the company, is not being provided access to inside information, and has been effectively handcuffed and gagged from considering or proposing a transaction for which it needs no financing.
Furthermore, we understand that GGP’s CEO has been making presentations alongside Brookfield to potential equity investors to assist Brookfield in raising capital for its transaction. While we are not opposed to Brookfield having a full and fair opportunity to put together a competitive deal to acquire GGP, it should not have an unlimited and exclusive right to do so with unfettered assistance from GGP management while competitors are not offered the same opportunity.
Ackman is pissed (rightfully so) that $BAM is “backdooring” a defacto acquisition of $GGP without paying a premium as other outside buyers would have to do. When you are minority shareholder, you are getting screwed by that process. I don’t blame $BAM for doing it, they should as they are acting in the best interest of their shareholders and if I was them I would be doing the same thing. The Board and management of $GGP is to blame for allowing it to happen.
The David Simon stuff isn’t going to happen. The potential antitrust issues that were raised initially when Simon offered to buy the co are larger now that $GGP has turned its operations around and it growing its business. The combined $GGP/$SPG colossus would effectively control the Class A Regional Mall space in the US. It won’t happen without significant divestitures essentially meaning $GGP is not sold but broken up. Further, David Simon, based on conversations I have had with him seems to be the type of CEO who, if now offered some of $GGP would look to make a statement now and lowball any potential offer to near his original in ’09-’10.
Yes, he would IMO unintentionally torpedo any potential deal attempting to rid himself of the bad taste in his mouth the last effort to buy $GGP left. Rather than view it as a second chance to get great assets he would take a “oh, now you need me” approach and try to stick it to $GGP management and shareholders…..
What Ackman wants is for $GGP’s Board to wake up and cap $BAM voting rights at the 38.2% they currently own. Simple. Once $BAM acquires >50% of the voting stock in $GGP (or in reality into the 40%’s) the potential upside to the stock becomes muted. Historically (other than $BRK) companies with >50% owners perennially trade at a discount. Why? The company essentially become privately owned with a small public float. The only opinion that then matters at all is the majority shareholder’s. A change of control, an activist investor or shareholders as a group pounding the table for chance are meaningless unless the controlling shareholder decided they also want change.
There are advantages for $BAM as they then have unfettered access to $GGP’s cash/platform and liquidity in the US to expand. For their purposes the share price of GGP stock can sit at $18 for years and they will still win huge and they collect dividends and the profits from the REIT. At that point they can also just continue to slowly build their stake until there is essentially no reason for other shareholders to own shares.
They take over GGP at a fractions of its actual worth when the reality is they should be paying a healthy premium to its current market price….just like any other buyer would.
This will get interesting….it always seems to be with $GGP
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Todd's investing strategy is essentially long with the rare short. He seeks to buy undervalued issues with an upcoming catalyst that will help them realized.... More »
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