Simon Says: “General Growth” (SPG, GGWPQ)

It seems that the realm of mergers and acquisitions is not dead when it comes to property deals.  Simon Property Group, Inc. (NYSE: SPG) has made a formal offer to acquire General Growth Properties, Inc. (OTC Pink Sheets: GGWPQ).  The fact that the merger is being planned is not the issue here.  It is the size… more than $10 billion.  This merger was telegraphed ahead of the event, so today’s development may be the first of several resolutions in a bankruptcy process.

The merger consists of about $9 billion in cash.  This is listed as “a 100% cash recovery of par value plus accrued interest and dividends…”  This applies 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 about $7 billion. General Growth shareholders would receive more than $9.00 per General Growth share.  The $9.00 is calculated as $6.00 per share in cash and more than $3.00 via a distribution of General Growth’s ownership interest in the Master Planned Community assets.  Simon Property said that it 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.

The existing secured debt on General Growth’s portfolio of assets would remain in place.  Simon expects the transaction to be immediately accretive to its Funds From Operations in the first year after closing.

Simon claims that this offers General Growth creditors and shareholders full, fair and immediate value.  Simon also noted that the offer is not subject to a financing condition and would be financed through Simon’s cash on hand and through equity co-investments in the acquisition by strategic institutional investors.  The balance will come from Simon’s existing credit facilities.  The offer is subject to confirmatory due diligence, which it believes can be completed within 30 days, and customary proceedings in the General Growth bankruptcy process, including bankruptcy court and creditor approvals.  The transaction is also subject to negotiation of a definitive transaction agreement between Simon and General Growth which would provide for reasonable certainty of closing.

Of the retail REITs, Simon is already valued at over $20 billion, which is close to double the value of Vornado Realty (NYSE: VNO).  Simon’s current dividend for its common REIT holders is 3.3%, and that yield is under many of its smaller peers.

JON C. OGG