Rouse looking over troubled Canadian real estate giant, but won't say why

August 28, 1994|By This article was reported and written by Sun staff writers Timothy J. Mullaney and Michael Dresser and correspondent Ted Jackson. Mr. Jackson is a free-lance reporter based in Chicago who obtained the confidential document.

Is it the real estate merger of the decade, or just bond traders hyping a deal that isn't real?

The question is quietly lurking around the Rouse Co. of Columbia, as reports originating in Canada say Rouse is investigating a possible deal to bail out one of that nation's biggest developers. The problem is that U.S. analysts who follow Rouse say they haven't heard the rumors and doubt it will happen.

Rouse is indeed probing the finances of troubled real estate giant Cadillac Fairview Inc., which has been staggering since the recession wrecked a $2.7 billion 1987 leveraged buyout led by the Chicago-based JMB Realty Trust.

Rouse confirms that it has signed a confidentiality deal with Cadillac Fairview. A spokesman for Cadillac declined to say if there is any agreement, but said his company has sought confidentiality deals from several possible bidders to whom it has given access to its financial secrets.

"The purpose of it is to obtain confidential information and do preliminary work to allow them to be in a position to offer to make an investment," Cadillac Fairview spokesman Patrick Howe said. There is more than one situation like that."

"I'm not supposed to say nothing about nothing," Rouse investor relations director David L. Tripp said. "We look at lots of deals. Sometimes they happen, sometimes they don't and we don't feel it's appropriate to comment until there's something definitive to say."

Dramatic effect

If the deal actually happens, the effect on Rouse would be dramatic. It would give Rouse control over 70 U.S. and Canadian properties, mostly high-end shopping malls and mixed-use projects, including some of the nation's most glamorous business and retail addresses, to a Rouse portfolio that includes 78 retail properties and more than 50 office projects.

The engine behind the rumors is a late-July letter from a vice president at Goldman Sachs & Co., the New York investment bank, to outside financiers who head Cadillac Fairview's two major creditors' committees.

In the letter, which was obtained by The Sun, Goldman vice president Ralph Rosenberg says Rouse has signed a confidentiality agreement with Cadillac Fairview in exchange for the right to examine its financial records. Such a review -- called a "due diligence" investigation -- gives investors much more information than companies disclose in quarterly earnings reports.

"We would recommend the Rouse Co. as new management," the letter says. "We believe Rouse would be in a position to make a cash investment and to potentially offer Rouse common stock as consideration, if creditors prefer, for a stake in [Cadillac Fairview]."

Goldman Sachs recently paid a reported $158 million for 25 percent of Cadillac Fairview's bank debt.

Mr. Rosenberg wrote that Rouse won't talk to Goldman Sachs because of the confidentiality agreement, but urged the creditors to force Cadillac Fairview to allow them to talk to the Maryland company.

He told creditors that putting Rouse in charge of a restructured Cadillac Fairview would be smart because, they would get more of their money back if the company keeps operating instead of auctioning off its assets. The letter started enough bond-market speculation to lead the Globe and Mail in Toronto to report that "New York market players" believe Goldman is "running interference" for Rouse in a plan to "make a bargain-basement bid" for Cadillac Fairview.

However, that would flatly contradict Mr. Rosenberg's written assertion that Goldman and Rouse had not coordinated their actions.

But one of the people the letter was addressed to said nothing has come of Goldman's plan so far.

No deal yet

"That's what Goldman is proposing," said Geoffrey Godard, a Toronto banker who is coordinator of Cadillac Fairview's bank lenders' steering committee. "There is no deal on the table, with Goldman or without Goldman."

Mr. Rosenberg said he would also be willing to talk with other potential bidders, who have been reported to include Simon Property Group Inc. of Indianapolis, Taubman Centers Inc. of suburban Detroit, and Chicago developer Sam Zell, who controlled the One Charles Center tower in Baltimore until last year.

The other recipient of the letter, Trust Company of the West managing director Bruce Karsh, declined to comment. "You are getting into an area that's way too sensitive," he said.

A Goldman spokesman declined comment.

The problem with the scenario is that analysts who follow Rouse more closely than the bond traders are skeptical that the deal Mr. Rosenberg proposed could -- or would -- happen.

There would be one obvious reason to move ahead with the deal, said analyst Catherine C. Creswell, who follows Rouse for Alex. Brown Inc. of Baltimore.

Big returns

She said real estate investment trusts have made big returns since the recession by buying properties at prices that were available only because the sellers had big financial problems and pressing cash needs.

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