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On Monday, August 27, activist investor Bill Ackman's hedge fund Pershing Square Capital Management released a letter in response to a letter by Brookfield Asset Management (BAM). Both letters involve General Growth Properties (GGP), and more specifically, regarding allegations made by Ackman last week that BAM might be attempting to acquire GGP on the cheap.

There are several previously unknown, newly alleged details described by Ackman in this letter, many of which cast BAM in a fairly negative light in terms of its interests versus those of other GGP shareholders. Most notably, Ackman recounts BAM offering to buy out Pershing at $19 per share, which Ackman states he rejected, that BAM had maneuvered so as to complicate and effectively block a GGP takeover attempt by Simon Property Group (SPG) and that BAM's apparent goal is to take control of GGP. Ackman's newest letter urges that GGP should "immediately form a special committee" and "initiate negotiations with Simon promptly."

Brookfield Asset Management is a Canadian real estate company that manages a portfolio of assets valued at over $150 billion, and which holds significant-to-majority positions in numerous Brookfield branded subsidiaries.

General Growth Properties is currently the second largest U.S. shopping-mall owner. The company filed for bankruptcy in 2009 after accumulating about $27 billion in debt that it couldn't easily refinance because of the collapse of the commercial mortgage-backed securities market that followed the subprime residential mortgage collapse.

The company exited bankruptcy protection in November 2010, following a takeover battle between Indianapolis-based Simon, the largest U.S. shopping-mall owner, and a group that included Pershing and BAM, among others. Since emerging from bankruptcy protection, GGP has also spun off Howard Hughes (HHC) and Rouse (RSE). Apparently, SPG has never lost its desire to obtain GGP's premium properties, and Pershing believes that a deal can be reached within the coming months.

Last week, Pershing sent a letter to GGP's board of directors, urging the mall owner to consider a sale, and prompting this letter war between Brookfield and Pershing. Pershing owns 72,233,712 common shares of GGP, long-term warrants on 18,224,213 shares and cash-settled swaps on 7,569,272 million shares, which combine to give the hedge fund a 10.2% stake in the company.

The first Pershing letter indicated the fund discussed a potential acquisition of GGP by Simon Property Group, and that Pershing believes Brookfield Asset Management may have plans to purchase GGP at a price below that which SPG would have paid. Ackman also noted that BAM currently owns about 40% of General Growth, that "It is only a matter of time before Brookfield de facto controls the company," and that "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." Given BAM's current equity position in GGP, it would own a majority of GGP if it acquired Pershing's position.

Brookfield almost immediately responded to Pershing's initial letter by stating that BAM is not taking any steps to acquire GGP or having any discussions with third parties in that regard. Brookfield's current stake in GGP stands at about 42%. It appears possible that BAM will again respond to Pershing's most recent letter

According to Ackman's initial letter, SPG was "effectively handcuffed and gagged" by Brookfield's influence over GGP. Apparently, Pershing Square and Simon Property group had discussed a deal in which SPG would acquire GGP for 0.1765 of a Simon share for each General Growth share. Based upon SPG's share price at the time the letter was written, such a deal would value GGP at about $28 a share, or roughly a 65% premium GGP's price before Pershing's letter, or a 40% premium to its current valuation.

According to Brookfield's statement last week, BAM has considered "a variety of possible transactions which would facilitate Pershing Square's desire to maximize the value of and create liquidity for its interest in GGP," but also added that such discussions "are not continuing." Brookfield argued that Ackman's letter was self-serving and potentially designed to provide Pershing with an improved price and added liquidity in order for the fund to sell out of GGP. Ackman's newest letter responds to this by commenting that Pershing would be able to divest its GGP stake within 90 days if it wanted to, "with minimal if any market impact."

Despite Simon's apparent interest in GGP, such an acquisition would not seem to jive with BAM's stated disinterest in selling its stake. With a 42% position in GGP, it would require Simon to obtain the approval of almost all other shareholders. Given Brookfield's considerable position in GGP, Simon is unlikely to try to again attempt to acquire GGP without Brookfield's unambiguous cooperation. According to Pershing, back in April, Brookfield proposed buying GGP and simultaneously divesting itself of 68 of GGP's malls to Simon, but Simon allegedly rejected the proposal because it did not like the selection of malls and also that the price was too high.

Given the prompt letter salvos being fired by Pershing and BAM, it appears likely that we have not heard the last from either side regarding GGP, and probably not even the last in August. All of this posturing may actually be indicative of some last stage negotiating between these parties over price.

Source: Pershing Vs. Brookfield: The Fight For General Growth Properties Continues