NEW YORK – Feb. 17, 2010 – Mall king Simon Property Group on Tuesday offered $10 billion to buy rival General Growth Properties, highlighting how companies not seriously wounded by the credit crunch’s effects find themselves in the position to gobble up those that are.
The hostile offer from Simon, the largest U.S.-based operator of domestic malls, is the biggest proposed real estate acquisition since the buyout of Archstone-Smith during the bubble in October 2007, Dealogic says.
The offer comes as General Growth’s management attempts to get more time to restructure debts that became too burdensome during the financial crisis. Whether or not the deal is accepted, though, analysts say Simon’s offer shows how the complexion of mall ownership is about to change.
It’s also a vote of confidence: At least one large real estate player is willing to bet on a recovery of consumer spending, even if it’s not apparent.
“Folks are trying to be on the right side of the recovery,” says Jim Beers, portfolio manager of the Stratton Real Estate fund, which owns Simon shares.
The proposed deal is important because of its potential:
• Shift in ownership of major retail centers. Simon owns 162 of the nation’s top malls, says Keefe Bruyette & Woods. A combination with General Growth’s 213 malls would create a powerhouse able to better negotiate terms with the retailers that rent space, says KBW’s Benjamin Yang.
Considering there are just 1,200 desirable malls in the U.S., Simon is understandably eager to buy General Growth’s, says Richard Moore of RBC Capital. “There aren’t many good malls,” he says.
The deal would also further expand Simon into Las Vegas, where General Growth has been dominant.
• Test of aggressiveness of other real estate companies. There’s no deal yet, and investors appear to be hoping for a better offer. Shares of General Growth, which trade on a lightly regulated marketplace, jumped 28 percent to $12.02, well above the deal’s roughly $9-a-share value to shareholders.
Two other mall operators are likely candidates for possibly bidding: Australia’s Westfield and Canada’s Brookfield, Moore says. But Simon’s history indicates that when it’s interested in a deal, it’s serious about winning, Moore says.
• Look at how companies that stumbled in financial crisis will emerge. General Growth’s management is attempting to retain its privileged position through bankruptcy court protection, but its exclusive right to deal directly with the bankruptcy court expires at the end of this month. Simon’s bid, which would repay bondholders, will be hard for the judge to ignore, Moore says.
At the very least, the offer makes it harder for investors to be patient with General Growth, says Keven Lindemann of SNL Financial. “This is a valid bid, and (General) will have to respond to it,” he says.
Simon had no comment, and General didn’t return a call for comment.
