That didn't take long. After all the "Will they or won't they?" speculation surrounding Simon Property Group's bid for General Growth Properties that's been circulating around the last couple of days, the REIT has made its intentions clear.
Simon now wants to supplant Brookfield's place in GGP's recapitalization. It claims its offer is superior to Brookfield's for several reasons including that it would not seek any warrants. It would also agree to limits on its governance rights. It says it would welcome working with Fairholme and Pershing Square if those investors too would forego any claims on warrants.
The other nugget here is that Paulson & Co. has officially entered the fray as it is willing to provide a $1 billion co-investment as part of Simon's offer.
However, at the end of the letter, Simon does add that, "If you are interested, we remain prepared to discuss with you instead an acquisition of GGP in a fully-financed transaction."
Update: The Wall Street Journal does a good job explaining the implications of dropping the warrants.
Thus, the Simon offer is a gamble that the Brookfield group will walk away from theabsent the warrants.
The warrants are critical because they represent a significant cost for any acquirer of General Growth later in the process. The warrants are guaranteed to the Brookfield group if U.S. Bankruptcy Judge Allan Gropper grants the Brookfield bid "stalking horse" status, making it the bid that others must top. He is slated to make that determination at an April 29 hearing.
Thereafter, any company that subsequently buys General Growth and unseats the Brookfield group must pay an estimated hundreds of millions of dollars to retire the warrants.
Simon's representatives have said Simon is unlikely to continue to participate in the bidding process if the Brookfield group, rather than Simon, wins the stalking-horse designation.
Here's the text of Simon's release.
Simon Property Group Offers to Invest $2.5 Billion in General Growth Reorganization Plan at Same Per Share Price as Existing Brookfield-Sponsored Proposal
--Superior Proposal Would Eliminate Equity Dilution from Warrants --Paulson & Co. Agrees to $1 Billion Co-Investment
INDIANAPOLIS, April 14, 2010 /PRNewswire via COMTEX/ --Simon Property Group, Inc. (NYSE: SPG) ("SPG") today sent a letter to General Growth Properties, Inc. (NYSE: GGP) ("GGP") offering to invest $2.5 billion in a General Growth reorganization at the same per share price as the plan of reorganization sponsored by Brookfield Asset Management. SPG's proposal is substantially more favorable to GGP and its equityholders than the currently proposed plan of reorganization because it would eliminate the highly dilutive warrants that GGP proposes to issue to Brookfield, Pershing Square and Fairholme Capital. SPG's proposal also includes a $1 billion co-investment commitment by Paulson & Co.
Following is the text of the letter sent today by Simon Property Group to General Growth:
April 14, 2010
Mr. Adam Metz
Chief Executive Officer
General Growth Properties, Inc.
110 North Wacker Drive
, Illinois 60606
This will formally confirm that Simon Property Group is prepared to participate in the recapitalization of General Growth Properties in the same format as the proposed plan of reorganization sponsored by Brookfield Asset Management, but on a basis very substantially more favorable to GGP and its equityholders, as outlined below.
Consideration. Simon would acquire 250,000,000 shares of common stock in GGP for $2.5 billion in the aggregate, or $10.00 per share, the same amount as Brookfield would acquire, at the same price, pursuant to its Cornerstone Investment Agreement. Simon would also backstop the GGO rights offering as contemplated in the Brookfield sponsored recapitalization, and would otherwise enter into agreements on the same basis as Brookfield with respect to the recapitalization of GGP and the spin-off of GGO, subject to the adjustments for the benefit of GGP outlined herein.
Warrants. Simon would not receive any warrants or similar payment or fees in respect of its commitment to invest in GGP, either on an interim basis, or as part of the post-reorganization consideration to be issued to Simon in respect of its investment. GGP's equityholders would accordingly not suffer the dilution contemplated by the Brookfield investment, and their ongoing interest in GGP would be substantially more valuable. We estimate that this benefit could be at least $895 million, or $2.75 per share based on today's share count.
Governance. In order to ensure that GGP remains an independent company for all regulatory purposes and avoid the interposition of any challenge to the proposed transaction, Simon is prepared to agree to the limits on its governance rights described in Annex A. These governance mechanisms - which you and your counsel should find familiar from other similar situations - will obviate any possible concern about Simon exercising inappropriate or unreasonable influence over the reorganized GGP. Our counsel are of course prepared to discuss these matters with yours.
Co-Investors. If Pershing Square and Fairholme will agree to amend their investment agreements with GGP to forego the warrants currently contemplated by those agreements, Simon would welcome them as co-investors in GGP's recapitalization. However, a number of alternative sources of capital are interested in co-investing in GGP with Simon, on such terms, in their stead. Pursuant to the attached letter from Paulson & Co. Inc., Paulson is prepared to co-invest at least $1 billion with Simon in connection with a Simon sponsored recapitalization of GGP. In order to ensure the success of GGP's recapitalization, in addition to working with GGP to negotiate and finalize the revised Pershing Square and Fairholme co-investment commitments or replacements thereof, Simon will itself fully backstop the entire amount of such co-investment commitments, without any warrants, as well as backstopping an additional $125 million investment in GGO as Pershing Square and Fairholme are currently contemplated to do. However, it is not Simon's intent to gain control of GGP pursuant to this backstop obligation, and, as set forth on Annex A, Simon would agree not only to seek the disposition of any shares issued with respect to its backup commitment as promptly as practicable, but also to the effective sterilization of such interest for voting and control purposes prior to such disposition. Simon's voting interest in GGP would generally be limited to 20% of the outstanding shares.
No Financing or Other Contingencies. There will be no financing condition whatsoever to Simon's obligations to close the transaction. Simon, which has an equity market capitalization in excess of $27 billion, $3.5 billion of available cash on its balance sheet, and $3.3 billion of available borrowing capacity under its revolving credit facility, and would be fully and immediately responsible for its commitment and backstop obligations, in distinction to Brookfield, which does not seem to have yet delivered an equity commitment to the shell subsidiary with which GGP contracted and seems to be entirely free to walk away from the agreed deal. Simon's investment would not be contingent on any vote of Simon shareholders, and Simon will not require any commitment or other fee in respect of its equity investment commitment in the recapitalization of GGP.
Improvement to Brookfield Terms. Except as specified herein, the terms of Simon's commitment to invest in GGP would be substantially identical to Brookfield's obligations pursuant to the Brookfield investment agreement and the other agreements contemplated thereby. Our proposed form of investment agreement is attached, along with a comparison to the Brookfield agreement.
If you are interested, we remain prepared to discuss with you instead an acquisition of GGP in a fully-financed transaction.
We look forward to hearing from you and to working together to consummate a transaction.
Very truly yours,
Chairman of the Board and
Chief Executive Officer
cc: Board of Directors, General Growth Properties, Inc.
Official Committee of Equity Security Holders
Official Committee of Unsecured Creditors
Jackson Hsieh, UBS Investment Bank