Simon Properties: Prime Outlets Buy Could Spell End of General Growth Deal

Includes: BAM, GGP, SPG
by: Todd Sullivan

This may just give us a buying opportunity today.

The news:

Simon Property (NYSE:SPG) to acquire Prime Outlets for ~$2.325 bln (73.90)

Co. announces that it has entered into a definitive agreement whereby Simon will acquire all of the outlet shopping center business of Prime Outlets Acquisition Co and certain of its affiliated entities in a transaction valued at approx. $2.325 billion, including the assumption of Prime Outlets’ existing indebtedness and preferred stock. Under the terms of the agreement, Simon will pay equity consideration of approximately $0.7 billionfor the owners’ interests in Prime Outlets. The equity consideration to Prime Outlets’ owners will generally be comprised of 80% in cash and 20% in SPG common operating partnership units, which will be based on a ten day trading average of SPG common stock shortly before closing, subject to a 10% collar. Simon expects the transaction to be immediately accretive to Funds from Operations. Simon intends to fund the cash portion of the equity consideration using its existing sources of capital.

It looks like General Growth (GGWPQ.PK) will sell off today on the news that Simon, a rumored buyer, will now not have the ability to purchase it. But, if we look at, once Brookfield Asset (NYSE:BAM) entered the fray this week, Simon had no chance of making a deal. As the only one in the race, they could have received FTC clearance for a deal as it would have “stabilized a large part of the CRE market”. Once competition stepped in, BAM would have been the odds on favorite to do something as it would have avoided the monopoly Simon would have enjoyed should they get GGP.

Add that to last night’s news that Brookfield is willing to go the JV route with General Growth and let them emerge as an independent company and Simon’s ability to get what they want evaporated.

So, they go to choice #2.

Does this diminish any potential value for GGP? No. The BAM JV idea actually enhances it as it may enable them to reduce the $6B of unsecured debt without converting it to equity (depending of course on the structure of a deal). That would be very good for current shareholders as it dramatically reduces the dilution.

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