General Growth investor Pershing Square opposes Simon offer, agrees to forego interim warrants

By Caroline Salls

Pittsburgh, May 7 - Pershing Square Capital Management, LP voiced its opposition to a takeover of General Growth Properties, Inc. by Simon Properties Group, Inc. and agreed to forego its right to receive interim warrants to purchase 17 million shares of General Growth as consideration for its stock purchase commitment in support of the company's standalone plan of reorganization.

According to a news release, Pershing Square's agreement to forego its interim warrants was conditioned on Friday's hearing on approval of General Growth's emergence transaction process and the issuance of interim warrants to Brookfield Asset Management and Fairholme Capital Management, LLC under their separate investment agreements.

Pershing Square said the other terms and conditions of its stock purchase commitment, including the warrants and securities that would be issued to Pershing Square and its affiliates in connection with the effectiveness of the standalone plan of reorganization, would remain unchanged from the amended terms previously announced.

In a letter to General Growth's board of directors, Pershing Square's William A. Ackman said Pershing Square and the company's other owners "are extremely concerned about the catastrophic risk of a failed GGP emergence transaction."

As previously reported, members of the Brookfield-led investor group are slated to receive 120 million interim warrants at $15 per share, 40% of which vest upfront, and the balance beginning 60 days after the bid protection hearing.

Because Pershing Square would receive more than 17 million of these warrants for providing its share of the commitment, Ackman said in the letter that the company has agreed to forego its right to receive its share of the interim warrants if the hearing went forward on Friday and allow the 103 million remaining interim warrants to be issued to Brookfield and Fairholme to eliminate the potential for the appearance of any conflict.

Ackman said the waiver of the warrants will also reduce the frictional costs associated with General Growth selecting the Simon going-private alternative or other future alternatives that may arise by the completion of the plan of reorganization.

"The existence of a fully committed and fully funded backstop will materially increase the company's bargaining power with SPG, and, as a result, shareholder value," Ackman said in the letter.

Ackman said it would be foregoing $128 million of value, based in Simon's estimate, in exchange for the board's attention.

Simon proposal flaws

Despite Simon Property Group's claims that its proposal would be worth $20 per General Growth share, Ackman said the Brookfield-led investors believe that the Simon acquisition is worth materially less than that.

Ackman said Simon was fixing the exchange ratio of Simon Property Group and General Growth stock Friday, having reduced the amount of cash in the current bid from its very first $6 per share proposal.

"In the proposed transaction, shareholders remain fully exposed to SPG's stock between now and the potential closing of the SPG transaction," Ackman said in the letter.

"Thereafter, shareholders who choose to hold SPG stock will participate to a minimal extent in the value created in the GGP portfolio as it will be diluted by SPG's larger portfolio of stabilized mall assets.

Why should an investor trade a high-potential equity for one with lower upside potential when the standalone alternative offers greater upside with a similar risk profile?"

In addition, Ackman said Simon's ability to attract other participants to invest in a General Growth recapitalization will be remote if the Federal Trade Commission does not approve the takeover.

"The SPG recap transaction suffers not just from antitrust risk, but also from the large amount of losses SPG will likely incur from a requirement to invest and then divest $2.5 billion in a company which SPG cannot acquire," Ackman said in the letter.

"As a result of this large potential loss, we would expect that SPG would do anything in its power to avoid consummating the recapitalization transaction."

Unlike the Simon transaction alternatives, Ackman said the Brookfield-led standalone plan will have no antitrust risk and can therefore be completed in a timely fashion.

General Growth, a Chicago-based real estate investment trust that owns regional shopping malls, master planned community developments and commercial office buildings, filed for bankruptcy on April 16, 2009 in the U.S. Bankruptcy Court for the Southern District of New York. Its Chapter 11 case number is 09-11977.

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