On August 23, 2012, Bill Ackman's hedge fund, Pershing Square Capital Management, through a letter addressed to the board of directors of General Growth Properties (GGP) urged the company to consider a sale before Brookfield Asset Management purchased enough shares to take control of GGP. Pershing Square Capital Management, which has a combined holding of 10.2% in the company, also happens to be one of the two largest shareholders of General Growth Properties. According to the letter, Pershing Square Capital Management, the second largest shareholder of General Growth Properties, discussed with the company a takeover by its biggest shareholder with 42.2% of combined holding (Brookfield Asset Management Inc. (BAM)), and its largest competitor (Simon Property Group Inc. (SPG)). In response to the news, the share price for General Growth appreciated by approximately 10% the same day.
By writing the letter, Pershing Square Capital Management aims to prevent Brookfield from acquiring General Growth unfairly, and seeks to provide a level playing field for all potential takeover candidates. Pershing Square further states that Brookfield has handcuffed Simon Property in acquiring General Growth. The letter highlighted Pershing Square Capital Management's and other shareholders' concerns and requested the board of General Growth to constitute a special committee that does not have any members associated with Brookfield, and that this committee should seek legal and financial advice to manage the sale process. The committee also makes possible the dissemination of confidential information needed for due diligence to all potentially interested parties.
Brookfield Asset Management, which is the biggest shareholder of General Growth, designates three of the nine board directors. However, it does not have control over General Growth Properties. This was one of the most debated elements during the discussion of the bankruptcy of General Growth Properties. The price Brookfield paid for the stock and warrants of General Growth did not reflect a control premium. According to the initial investment made by Brookfield, the company owned a total of 29%. Brookfield has since then been able to enhance its holdings to 42%, and the letter states that it is only a matter of time before Brookfield controls the company. General Growth's shareholders will be at a disadvantage if control over the company is surrendered to Brookfield in this way, as the latter would not pay any control premiums.
If Brookfield is allowed to increase its stakes in General Growth, it would pay no premium for control. However, if the offer made by Simon Property is completed as originally proposed in October 2011, Simon Property would be paying a 40% premium on yesterday's closing price. Therefore, General Growth's shareholders would be better off with Simon Property acquiring them. On the other hand, after the acquisition, Simon Property will benefit from increased geographical concentration in the United States.
Simon Property reported a stronger than expected second quarter performance amidst a weak U.S. retail environment and stubbornly high unemployment. Due to the impact of its investment strategy and strong operational performance, the company raised its year end Funds from Operations (FFO) forecast by 133 bps to $7.6 per share. Besides having malls in the United States, Canada and Europe, Simon Property also owns malls in Asia, including Malaysia, Japan and Korea.
Simon Property has $640 million in excess cash on its balance sheet and has multiple revolving credit lines giving it access to another $6.5 billion. Simon Property has 850 million capital stock and 512 million common stock authorized, respectively, of which 300 million are issued and outstanding. To purchase the 937.8 million shares outstanding of General Growth, Simon Property has to issue another 165.5 million new shares.
Brookfield Asset Management responded the next day and the share price for General Growth plunged 3%. Brookfield made it clear that it is not moving to take over General Growth and it does not even intend to sell its holdings in the company.
Earlier, we recommended Simon Property to our investors. We reiterate our buy stance for the stock, since Simon Property's acquisition of General Growth, we believe, will be a win-win situation for the shareholders of both companies. We also recommend our investors to go long General Growth if Brookfield paves the way for the acquisition of General Growth by Simon Property.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.