Simon Properties Offers to Buy GGP for $10B

Includes: GGP, SPG
by: Reggie Middleton

From PR Newswire:

Simon Property Group Makes $10 Billion Offer to Acquire General Growth Properties

Offer Provides 100% Cash Recovery Plus Accrued Interest To All Unsecured Creditors; Would Accelerate General Growth's Emergence From Bankruptcy

General Growth Shareholders Would Receive Value Exceeding $9.00 Per Share, Including $6.00 Per Share In Cash Plus Assets Valued At More Than $3.00 Per Share, While Avoiding Likely Dilution From Stand-Alone Recapitalization

Offer Supported By General Growth's Official Unsecured Creditor Committee

Acquisition of General Growth Portfolio By Best In Class Operator Offers Significant Value-Creation Opportunity For Simon Shareholders

INDIANAPOLIS, Feb. 16 /PRNewswire-FirstCall/ -- Simon Property Group, Inc. (NYSE:SPG) today announced that it has made a written offer to acquire General Growth Properties, Inc. (GGWPQ.PK) in a fully financed transaction valued at more than $10 billion, including approximately $9 billion in cash.

Simon's offer would provide a 100% cash recovery of par value plus accrued interest and dividends to all General Growth unsecured creditors, the holders of its trust preferred securities, the lenders under its credit facility, the holders of its Exchangeable Senior Notes and the holders of Rouse bonds, immediately upon the effectiveness of a definitive transaction agreement. This consideration to creditors totals approximately $7 billion.

General Growth shareholders would receive more than $9.00 per General Growth share, consisting of $6.00 per share in cash and a distribution of General Growth's ownership interest in the Master Planned Community assets valued by General Growth at more than $3.00 per share. Simon is also prepared to offer Simon common equity instead of the cash consideration, in whole or in part, as payment to those General Growth shareholders or creditors who would prefer to participate in the upside of owning stock in Simon. Under Simon's offer, the existing secured debt on General Growth's portfolio of assets would remain in place.

The Official Committee of General Growth's Unsecured Creditors has advised Simon that it supports the Simon offer, and encourages General Growth to engage with Simon promptly to allow the proposed transaction to be considered by General Growth's creditors and shareholders as soon as possible.

For those that don't follow me regularly, I released bearish research and shorted GGP at around $57 in 2007. It was a very profitable trade since GGP filed for bankruptcy a year later. Ackman from Pershing Square bought GGP shares/calls/swaps between 50 cents and 2 dollars per share, resulting in what looks like a home run deal.

He was confronted by Hovde Advisors, a DC asset management firm who was short the stock, over valuation and the closest thing to a hedge fund soap opera episode ensued.

While the SPG offer is nowhere near where Ackman was forecasting, it has been a profitable deal nonetheless.

I have made the subscription version of the full analysis available to anyone who registers now that this story has pretty much played its course. The full comparative analysis with updated valuation is now freely available upon free registration here: Middleton vs Ackman vs Hovde on GGP - subscription edition w. updated valaution Middleton vs Ackman vs Hovde on GGP - subscription edition w. updated valuation 2009-12-26 20:43:17 1.51 Mb. You may click here to subscribe to premium research or to register for free. Readers should be cognizant of the marketing component of investors publicly stated valuations. To illustrate this, let me post three paragraphs from the aforementioned analysis that pretty much says it all (keep in mind that SPG just offered $9 or so per share). I'll leave it up to the readers to determine who was the most accurate regarding GGP both on the short side going down (I think I was the only one declaring a position publicly) and on the long side going up (I did not have a position):

GGP valuation analysis

Hovde Capital Advisors

Hovde applies Q3 2009 annualized NOI (adjusted for lease termination fees, tenant allowances, maintenance capital expenditure and other non cash items) to Ackman's May 2009 GGP valuation analysis, and estimates the implied equity value of $5.73 per share at a 7.5% cap rate and negative $5.03 per share at an 8.5% cap rate. After incorporating the conversion of the unsecured debt into equity at price of $6 per share, the implied equity value is $5.94 per share at a 7.5% cap rate and $3.62 per share at an 8.5% cap rate

Ackman's response

Based on cash NOI (not adjusted for lease termination fees, tenant allowances, maintenance capital expenditure) for LTM ending Sep 2009, Ackman values GGP at $23.7, $32.0 and $41.6 per share at cap rate of 7.21%, 6.71% and 6.21%, respectively

Boombustblog's view

Based on our observations about assumed NOI and cap rate for valuation, we have revised Ackman's valuation analysis.

We computed cash NOI (adjusted for lease termination fees, tenant allowances, maintenance capital expenditure and other non cash items) for LTM ending Sep 2009. However, to factor in the impending rental decline to be realized in the short term largely owing to lease roll-overs, we estimated 2010 NOI assuming y-o-y decline of 7.5% against 5.4% y-o-y decline in 3Q09. We applied estimated 2010 NOI and more realistic cap rate range of 7.0% to 8.0% to the Ackman's valuation analysis. GGP's valuation is $6.8 per share under the base case and $13.6 per share and $0.8 per share under the optimistic case and adverse case, respectively.

It appears as if SPG offered a reasonable acquisition premium over what we feel is reasonable for GGP. Ackman's (publicy disseminated) valuations were apparently in the stratosphere (and our analysis clearly demonstrated this point) while Hovde was a little pessimistic. Of course, the deal is not closed yet, so this is all just speculation for right now. I recommend all interested parties register and choose a free (or premium paid) subscription and download the full 11 page analysis referenced above.

Below is a quick chronology of events:

General Growth Properties & the Commercial Real Estate Crash, pt III - The Story Gets Worse, Wednesday, 09 January 2008

Was I right on my call on Commercial Real Estate Crashing? Tuesday, 12 February 2008

If only more rich heiresses read my blog Friday, 21 August 2009

Reggie Middleton's 2010 CRE Outlook and Response to the Ackman/Pershing Square Presentation Tuesday, 15 December 2009

It was bound to happen. Reggie Middleton vs Ackman vs Hovde on GGP! Saturday, 26 December 2009

The next step in the GGP saga Tuesday, 29 December 2009

Disclosure: No positions

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