There have been numerous write ups by longs and shorts on valuation. However there has not been much written up on how the valuation game will pan out in the court if GGP (GGWPQ.PK) is not able to raise full capital (7B to pay off its existing unsecured holders) or if the company is not bought out. I would like to do that here.
For General Growth it appears remaining secured creditors will fall in line and hatch out consensual loan extension agreements. However, the key pending issue that needs to be resolved is how the unsecured debt holders (7B$) will be made whole for their claim. The company is contractually obligated to de-lever balance sheets based on loan extension agreements with secured lenders. Also the Bankruptcy court may not allow a plan of reorganization that entails an unviable and highly leveraged capital structure even if the company can meet its interest expenses. The court probably needs to assure that the company is insulated from another short or mid term distress. So this makes it abundantly clear that the company would need to replace 7B unsecured debt with equity capital (common or preferred).
As mentioned earlier, If the company is bought out at the price that is agreeable to the board or the company is able to do FULL (7B) capital raise transaction or get commitment for future capital raise transaction (immediately post chapter 11) on agreeable terms, then we have no problems here. However if neither happens, then a long drawn out valuation battle in the Bankruptcy court is likely. Unsecured Creditors Committee would obviously be valuating the company much lower so they get a bigger piece where as the Ad hoc Equity Committee would be valuating it at higher price so they get to retain residual stake even after paying for unsecured claims.
When there are big differences between the Ad hoc equity committee's valuation versus creditors, the court probably has to weigh in.
I think below are some pertinent points on how the valuation game will play out in bankruptcy court if the company cannot raise the full capital.
Valuation Methodology - Valuation would be based on the following 3 methodologies: DCF, Comparable Company's (Simon in this case) valuation and Precedent Transaction analysis.
Let’s take the Comparable Company’s valuation methodology. The comparable company and comparable transaction analyses that are constituents of the market approach to value are typically retrospective or backward-looking in nature. They often compare the revenues, EBIT, and/or EBITDA of a company during the LAST REPORTED 12 months to such figures for similar firms that have a market-determined or transaction-indicated value to estimate the worth of the subject firm.
On the trailing LTM basis, Pershing’s analysis values GGP midpoint at 32$ (using Simon as its comparison) using trailing LTM NOI of both the companies.
Personally, I think the Precedent transaction analysis would not figure here as there is NO SALE of the scale (national platform) of GGP. GGP has nation-wide retailers as its tenants and its income is largely dependent on leases with nation-wide retailers. Hence, I think looking at the CAP rate of individual property sales at the local level may not be an apples-to-apples comparison.
Valuation Testimony from Credible and Independent Valuation experts - The valuation from credible, experienced and independent experts will be one of the big factors. I think Greenstreet Capital, considering their REIT research experience would be a Gold standard on this. This is good news for GGP equity holders as Greenstreet Capital’s analyst recently commented on Pershing's valuation (which had mid value around 30$) and said "while assumptions are aggressive..it is still within a reasonable range."
Pricing on failed buy-out attempt - The bankruptcy court would consider any acquisition proposal in valuation matters. So, for example, if Simon makes a bid for GGP in totality (keep in mind this is what David Simon said he is interested on CNBC..."GGP in totality" not pieces of it) that values GGP equity at 6B (or 18$ per share) and let's assume for whatever reason the deal does not come to fruition, then the court would use that price as one piece in solving the valuation puzzle.
Company’s Testimony (not equity holders) on valuation - Unlike many chapter 11 cases here equity holders and the debtors' (company) valuation would be one or coinciding. This is considering the company is run by people that have a large equity interest. Many companies are run by executives that hardly have any equity interest. This is overwhelmingly not the case here with 45% held by 2 people (Bucksbaum and Pershing’s Bill Ackman) on board.
Pricing of Partial Private Placement of stock - Pricing of a private placement of stock to some interested parties for a partial capital raise would be another factor in valuation. For instance, if GGP can raised 1 billion on their valuation terms from outside, the court would consider that pricing in valuation.
Pricing of Potential Future Public offering post emergence and an objective analysis of how such an offering could be received - The court would consider the pricing of a potential public offering soon after the company relists on an exchange, presumably immediately after emergence from chapter 11. That could also play its part if they can get independent parties attesting to institutional interest in such an offering at a certain price. Again, Simon's market multiples will play a significant role. As for REIT mutual funds, Simon and GGP are the same as long as it can be shown to have similar operational and financial risk
Emergence Premium –Benefit of Restructuring increases Valuation - The valuation would also to take into account the company’s FUTURE Prospects post restructuring. It may be some time after it emerges from Chapter 11 before a company regains its full competitive bearings and manages to reduce its risk profile. Accordingly, some courts have allowed experts to incorporate an “emergence premium” or a “company-specific risk premium” into the discount rate they use in calculating the present value of the company’s projected future cash flows.
GGP was run by family and one could argue that it was not very professionally managed.
So management’s projected EBITDAR for the company, after asset adjustments and operational improvements have been accomplished, would be a more accurate basis for measuring a company’s worth upon exiting bankruptcy.
In the application of the comparable company and comparable transaction analyses to the Chapter 11 company before it, the court in Exide Technologies recognized that those analyses should reflect the “benefit of the [company]’s restructuring,” and that “it is appropriate to use projected, rather than historic, EBITDAR.
GGP is looking at non-core asset sales, the Brazilian IPO to sell off its properties there, returning “dogs’ properties (they can do it due to the non recourse-ness of its secured debt) that are underwater (also on cash flow basis) to the creditors.
All the above would likely impact enterprise value
Disclosure: I was long GGWPQ.PK but current do NOT own any position in GGWPQ.PK. I am not a lawyer and the write up is just based on my prior observations/experience.