General Growth says it will split

Canadian investor will help mall owner out of bankruptcy

February 25, 2010|By Edward Gunts | ed.gunts@baltsun.com

General Growth Properties, owner of most shopping malls in the Baltimore area and a number of prime properties in Columbia, announced Wednesday that it plans to split into two companies and has negotiated a $2.6 billion investment from a Canada-based company as part of a plan to exit bankruptcy.

Chicago-based General Growth said that Brookfield Asset Management of Toronto, one of the world's largest real estate investors, has offered to invest in a proposed recapitalization at a value of $15 per share. Brookfield's proposed commitment is expected to create a "floor value" for the stock as the company seeks to raise additional capital.

Under the agreement, one company would contain the "core assets" of General Growth, including most of the regional malls. A new company called General Growth Opportunities would contain the master-planned communities, including Columbia, and certain "landmark" properties such as the South Street Seaport in New York.

The announcement came one week after General Growth rejected a $10 billion hostile offer from its rival, the nation's largest shopping center owner, Simon Property Group of Indianapolis, to buy its holdings, including Towson Town Center, Owings Mills Mall, White Marsh Mall and other Maryland properties, all developed by the Rouse Co.

General Growth, the nation's second-largest shopping center owner, acquired Rouse for $11.3 billion in 2004 and filed for bankruptcy court protection last year, after running into financial troubles caused largely by its acquisition of Rouse.

It remains unclear which General Growth company would own certain Maryland properties, including Harborplace and the Gallery, the Village of Cross Keys and Mondawmin Mall in Baltimore.

Company's statement
The company said in a statement that "by creating two separate companies, we enable both companies to manage their core strengths, take advantage of different market opportunities and appeal to distinct groups of investors."

The agreement is subject to approval by a bankruptcy court judge, creditors and shareholders. A hearing is set for next week.

Analyst David M. Fick of Stifel Nicolaus in Baltimore said he sees Brookfield's commitment as the start of a process designed to draw out higher bids for General Growth and its assets.

Fick expressed skepticism that the transaction would ever come about, noting that Brookfield doesn't operate any regional malls at present and that Brookfield played a similar "stalking horse" role several years ago to drive up the sale price of the former Mills Corp. malls to Simon.

"It's a stalking bid," Fick said. "It's simply a mechanism to create a bidding process to get the company a higher offer. It's greenmail."

Mark Millman, president of Millman Search Group, an Owings Mills executive search firm that specializes in retail, said General Growth should take the Brookfield offer "very seriously."

Scarcity of suitors
"Obviously, there aren't too many suitors coming to the aid of a bankrupt developer right now," Millman said. "I think the last thing they want is to be taken over by Simon, because Simon would break up the company and sell it off piece by piece."

Under the terms of the proposed plan, General Growth's existing shareholders would receive one share of new stock with an initial value of $10 per share, plus one share of General Growth Opportunities, with an initial value of $5 per share, for a total compensation of $15 per share.

Brookfield would invest $2.5 billion at $10 per share for new General Growth stock and up to $125 million at $5 per share for General Growth Opportunities stock. That investment would give Brookfield ownership of roughly 30 percent of General Growth, while giving General Growth the liquidity it needs to emerge from bankruptcy. Brookfield also would have the right to nominate three directors to the board.

Shares of General Growth slipped 8 cents to $12.89 Wednesday. Shares of Simon fell 38 cents to $77.53, while Brookfield shares dipped 5 cents to $22.79.

Simon officials said in a statement that their $10 billion offer, mostly cash, is "far superior."

"General Growth's proposed recapitalization amounts to a risky equity play on the backs of its unsecured creditors," the statement said. "Simon is providing $10 billion of real value - $3 billion to shareholders as well as $7 billion to creditors - as compared to a complex piece of financial engineering that is so highly conditional as to be illusory."

Baltimore Sun reporters Lorraine Mirabella, Jamie Smith Hopkins and Larry Carson and the Associated Press contributed to this article.

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