SPG’s Bid For General Growth

Ending months of speculation, Simon Property Group Inc. (SPG: 75.85 +1.03 +1.38%), the largest publicly traded retail real estate company in North America, recently made an unsolicited $10 billion takeover bid for its bankrupt rival General Growth Properties.
 
General Growth is arguably the second largest mall operator in the U.S. and owns over 200 malls in 45 states. In April 2009, General Growth filed for Chapter 11 bankruptcy protection primarily due to debt troubles arising from the acquisition of Rouse Company for $12.6 billion in 2004.
 
On the other hand, Simon was filling its coffers to capitalize on potential acquisition opportunities stemming from distressed selling. During fourth quarter 2009, Simon increased its unsecured corporate credit facility to $3.565 billion with a base interest rate of LIBOR plus 210 basis points.

At year-end 2009, the company had approximately $4.3 billion of cash on hand, including its share of joint venture cash, and an additional $3.1 billion of available capacity on its corporate credit facility.
 
If Simon is successful in its takeover bid, it could end up gaining control of approximately 30% of the malls in the U.S., becoming a retail real estate behemoth. Consequently, Simon would have greater bargaining power over its tenants, especially the national retailers whose stores serve as anchors.
 
The merger would also enable General Growth a speedy recovery from its Chapter 11 proceedings. Although General Growth has restructured and extended $11.6 billion in mortgages, it still has additional $3 billion of mortgages due and about $7 billion of outstanding unsecured debt.
 
Simon’s offer gives General Growth creditors about $7 billion in consideration by providing 100% cash recovery of par value plus accrued interest divided among holders of various debts and securities. General Growth shareholders would receive more than $9 a share, including $6 in cash plus assets valued at more than $3 a share.
 
However, General Growth has rejected Simon’s $10 billion offer, citing the bid value as too low.