Can Simon Make General Growth Properties Bid Worthwhile?

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Includes: GGP, IYR, SPG
by: Anthony Alfidi

Real estate analysts have argued recently that 2010 will prove to be the "year of foreclosures" with an onslaught of bankrupt commercial and residential property coming to market. Simon Property (NYSE:SPG) smells blood in the water and is making a bid for a troubled competitor, General Growth Properties (GGWPQ.PK).

Simon Property Group Inc. (SPG), the nation's largest shopping mall owner, made a $10 billion hostile bid Tuesday to acquire ailing rival General Growth Properties.

The acquisition would allow General Growth, the No. 2 owner of shopping centers, to emerge from Chapter 11 bankruptcy protection. General Growth filed for bankruptcy last year after buckling under the weight of billions in debt it racked up during a massive expansion effort fueled by cheap credit.

It's a cash and stock hostile bid. Simon Property's balance sheet seems to be strong enough to handle both this purchase and its pending bid for some assets from Prime Outlets Acquisition Co. If the offer as currently structured gives General Growth's shareholders $6 in cash and $3 in assets per share, the simple math argues for a fair value of $9/share. The market has bid this up to $12, incorporating both the full enterprise value of General Growth (including the $7B going to its creditors) and the possibility that Simon may sweeten the offer now that General Growth has rejected the initial offer.

It is noteworthy that the $3/share asset offer amounts to a total value of over $900mm given General Growth's outstanding shares of 312mm. Simon's shareholders would thus experience a dilution of about 4.2% given its present market cap. That's not so bad if Simon can translate the deal into higher rents from combining anchor properties. Success would mean Simon gains enough earning power to arrest the slide of its retained earnings into negative territory, even if it has to lever up slightly to make this bid more attractive.

Disclosure: Anthony J. Alfidi holds no direct position in either SPG or GGWPQ.PK at this time. He is long puts on IYR as a bearish bet against the entire real estate sector; IYR has a long position in SPG.

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