SPG offered $6 per share in cash to GGWPQ shareholders and par plus accrued interest to all unsecured note holders for a total offer of $10,000 m. This implies a 9% cap rate to value the entity, assuming NOI around 2,400 m and without accounting for the Master Planned Community Business. Every 10 bps change in cap rate (or 9.8 bps to be more accurate) equates to a $1 per share increase/decrease to GGP shareholders.
NOI=2,400
Total Secured Debt=18,000
Bank Debt=3,000
Bonds=4,000
Total Unsecured=7,000
Total Debt=25,000
Equity @ $6/share=1,885
EV=26,885
Implied cap rate=8.92%
Assuming a price of $3 per share to the Master Planned Community Business, the implied cap rate is reduced by 30 bps only. The deal failed to materialize.
Based on the press releases, GGP is pursuing a dual track process: soliciting offers for the whole company and attempting to emerge from bankruptcy as a standalone company through a large capital raise to de-lever and have the capital to payback the unsecured creditors. This may cause large dilution to shareholders, but it’s a less likely process, as the Company will look for potential bidders first. The sales process is expected to get underway in early March. The press release also indicated that they held discussion with “other interested parties” in coming to the conclusion to not preempt a full process with multiple bidders. Brookfield Asset Management (BAM) is likely Simon’s biggest competitor in a bid, though Simon still has the upper hand given their ability to drive greater synergies. Other interested parties are Westfield and Vornado.
Here is Simon’s offer made on Feb 16:
Dear Glenn and Adam:
We are prepared to acquire General Growth Properties, Inc. (“GGP”) in an all-cash transaction which will result in a favorable outcome for all of GGP’s creditors and shareholders, and a prompt conclusion to GGP’s reorganization proceedings. This letter is intended to provide you with the specifics of our proposal which are outlined below.
Consideration. Simon Property Group, L.P. (“Simon”) would provide a full cash recovery (par plus accrued interest and dividends) to GGP’s unsecured creditors, the holders of its trust preferred securities, the lenders under the GGP credit facility, and the holders of Exchangeable Senior Notes. Simon would also pay the holders of GGP common stock $6.00 per share in cash, and distribute to them all of GGP’s ownership interests in the MPC assets. We are willing to discuss consideration consisting (in whole or in part) of Simon common equity in lieu of the cash portion of the consideration to GGP’s stockholders, and perhaps certain of its unsecured creditors, for those who would prefer to participate in the upside associated with owning Simon stock.
We believe the current trading value of GGP’s common already includes a takeover premium, and given its high percentage of insider ownership and the fact that the stock trades in an over-the-counter securities market, reflects a price that cannot be realized in a stand alone reorganization. Any reorganization has a highly uncertain outcome which can be achieved only after an extended period of time, while incurring considerable additional expense, and may result in significant dilution of the current equity holders to the extent creditor claims are satisfied through the issuance of additional equity and/or GGP is recapitalized with proceeds from the issuance of new equity.
No Financing Contingency. We have, or have access to, all of the financial resources required to consummate this transaction, and the transaction would not be subject to any financing contingency or condition.
Due Diligence. The terms described above are based on publicly available information and subject to confirmatory due diligence. We and our team of advisors have thoroughly analyzed GGP, its assets and the ongoing bankruptcy proceedings, based upon publicly available information, and we are prepared to proceed immediately to undertake and complete confirmatory due diligence and to enter into and consummate this transaction as promptly as possible. Simon has an unmatched track record of completing large and successful acquisitions, and we are prepared to commit the resources necessary to address all issues and finalize a mutually beneficial transaction between our two companies.
We are convinced that a transaction with Simon is superior to any proposal you may be contemplating. We trust that when considering our proposal, you will take into account the many benefits of having GGP’s equity holders receive full and fair compensation for their interest versus the uncertain value in any other scenario. The fact that the proposal is all cash and pays unsecured creditors in full will bring certainty to the reorganization process and accelerate its completion which will have the added benefit of eliminating GGP’s significant bankruptcy related expenses.
Our proposal is not open-ended, particularly given the uncertain economic environment that exists today. We look forward to hearing from you soon and working together to consummate a transaction.
Very truly yours,
David Simon
And here is the response from GGP management:
Dear David:
Thank you for your letters dated February 8 and 16, 2010 in which you indicated Simon’s interest in acquiring General Growth Properties, Inc. (the “Company”). We appreciate that you took the time to meet in person with management, UBS and Miller Buckfire to explain your indication of interest, as well as provide your view on the timing and diligence process you require in order to convert your indication of interest into a fully documented definitive proposal. We have been discussing your letter with your financial advisors during this past week. Our advisors have also discussed our position with you as recently as yesterday. We and our board of directors have given considerable thought to your indication of interest and have concluded based on discussions with other interested parties that it is not sufficient to preempt the process we are undertaking to explore all avenues to emerge from Chapter 11 and maximize value for all the Company’s stakeholders.
As we indicated during our meeting, we are about to commence a process to explore several potential options for the Company’s emergence from Chapter 11, including a sale of the entire Company as you have proposed as well as a capital raise. The Company and its advisors have been working over the past several months to prepare the Company to launch this process. We will be providing detailed information on the Company, including a confidential information memorandum, financial projections, and asset level information to participants. We will also provide access to an electronic data room. As we are committed to fully exploring all potential options available to the Company, we would like to include Simon as part of this process. We believe the information we would provide to you as part of this process will enable you to better understand the Company, get to a higher valuation, and provide a fully documented offer.
We understand from our meeting with you and the press release you issued this morning that time is of the essence. We feel the same, and intend to run our process in an efficient and expeditious manner. We are currently finalizing the information memorandum and plan to send materials to participants in the process by the beginning of March. We would expect to receive indications of interest within 4 weeks of the launch of the process. In order to expedite your participation and evaluation of due diligence information, we will be sending to you shortly a markup of the NDA you provided to us during our meeting in Chicago.
Again, we appreciate your interest and we recognize the potential value that Simon could bring as an option for the Company to emerge from Chapter 11. The Company intends to pursue the process described above and we look forward to your participation. However, we reserve the right to pursue any proposals that we receive prior to or after formally launching the process so that we can maximize value for all stakeholders of the Company, and we reserve the right to change the process at any time we determine appropriate and without notice.
We would be happy to discuss this response further. To that end, you should feel free to contact either UBS or Miller Buckfire.
Sincerely,
Adam Metz