Simon Property Group has made a $10-billion offer to acquire General Growth Properties of Chicago. This move would merge the top two retail- focused REITs in the country, creating a company with more than 520 assets.
However, this is not a done deal, according to Ryan Thomas, a partner at Bass Berry & Sims PLC and an expert in mergers and acquisitions of public and private companies. Since GGP is still trying to pull a number of assets out of bankruptcy, Simon will need court approval as well as the approval of secured creditors and shareholders.
The creditors may be the easiest challenge. "The court will balance the interests of all creditors and consider the feasibility of the Simon transaction," Thomas explains. "The secured creditors may support the transaction, unless they see an alternate path that enhances their collateral-or unless the Simon transaction somehow impairs it."
The shareholders and board, on the other hand, are likely to be more of a test. It is not out of the realm of possibility that the board could reject the offer if they feel Simon is "bottom feeding when the stock is undervalued."
Thomas says, "One of General Growth's largest equity holders, Pershing Square, which happens to be an activist investor, has recently indicated that the company is vastly undervalued-placing its valuation significantly higher than the offer by Simon. It is also telling that the board has apparently not engaged in negotiations with Simon, presumably reflecting either a more optimistic view of the residual value of the equity or confidence in a better alternative plan."
Recent reports indicate Pershing Square believes GGP is worth $24 to $43 per share. The Simon offer comes to $9 per General Growth share, a total of"$6 per share in cash and all of GGP's ownership interests in the master planned community assets," according to Simon's offer letter.
This significant difference in perceived value could lead other companies, such as Brookfield Asset Management, to make a competitive bid at a higher price. A consortium of bidders is also a possibility, as that will allow a number of companies to come together and offer a larger purchase price.
With the reality of competition, Thomas says, Simon is likely to be holding back to have some leveraging power. "Simon is likely reserving some powder and not showing all its cards."
But at press time, GGP played a hand that few could anticipate. The beleagured REIT rejected Simon's bid, stating that the offer was not enough to dissuade them from attempting to emerge from bankruptcy on its own.Plus the company would like to entertain other offers. That decision infruritated a shareholder, who is now suing GGP for breach of fiduciary duty to obtain the most value for stakeholders.
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