NEW YORK, May 7 /PRNewswire/ -- Pershing Square Capital
Management, L.P. ("Pershing Square") today reiterated its
opposition to a takeover of General Growth Properties, Inc. (NYSE:
GGP) ("GGP") by Simon Properties Group, Inc., and agreed to forego
its right to receive interim warrants to purchase 17 million shares
of GGP as consideration for its stock purchase commitment in
support of GGP's standalone plan of reorganization.
Pershing Square's agreement to forego its interim warrants is
conditioned on today's hearing in Bankruptcy Court and the issuance
of interim warrants to Brookfield Asset Management and Fairholme
Capital Management, LLC as contemplated by their separate
investment agreements. The other terms and conditions of
Pershing Square's 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.
The text of Pershing Square's letter to the Board of Directors
is below.
May 7, 2010
The Board of Directors
General Growth Properties, Inc.
Ladies and Gentlemen:
I write to you as the investor with the largest economic stake
in the outcome of the decision before you. Having
participated in GGP's Phoenix-like
rise from the ashes only one year ago, we – like the company's
other owners – are extremely concerned about the catastrophic risk
of a failed GGP emergence transaction. I am reminded of Mr.
Buffett's two principal rules on investing:
Rule #1: Never lose money.
Rule #2: Don't forget Rule #1
As you know, I left the board to join with Brookfield and Fairholme to provide the
necessary capital to give GGP a fully funded exit financing from
bankruptcy. Under the terms of that transaction, members of
the investor group receive 120 million warrants (the "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, one might suggest that any advice I provide to the
board may be biased by the economics of those warrants.
In order to: (1) demonstrate my conviction and my belief
in the importance of my advice to the board, (2) eliminate the
potential for the appearance of any conflict and (3) align my
interests as closely as possible with other shareholders, Pershing
Square will agree to forgo its right to receive its share of the
Interim Warrants in the event the hearing goes forward this
morning, and the 103 million remaining Interim Warrants are issued
to Brookfield and
Fairholme.
The waiver of the Warrants will also have the benefit of
reducing the frictional costs associated with the company selecting
the SPG going-private alternative or other future alternatives that
may arise between today and 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.
By waiving our right to receive the warrants we previously
bargained for, you should understand that we are foregoing
$128 million of value (based on
Simon's estimates) in exchange for your attention, so please give
the below thoughts careful consideration.
Valuation of the SPG Acquisition Proposal
Because of the inherent antitrust risk to closure of an
acquisition by GGP's principal competitor, the SPG transaction
should be valued based on the expected value of its three potential
outcomes:
(1) the SPG acquisition of GGP closes,
(2) the FTC stops the acquisition but allows the SPG
recapitalization to proceed,
(3) the FTC does not permit either the SPG's acquisition or
recapitalization to proceed.
Valuation of the SPG Acquisition Proposal
Despite SPG's headline valuation of $20 per GGP share, we believe that the SPG
acquisition is worth materially less than $20 per share.
We note that SPG is fixing the exchange ratio of SPG and GGP
stock today, having reduced the amount of cash in the current bid
from its very first $6.00 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. 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?
Second, in the SPG acquisition, unlike in the Brookfield-led recapitalization, current GGP
shareholders will remain burdened by $300
million of master plan community tax liabilities and an
unknown amount of liabilities to the Hughes family, amounts which
become liabilities of GGO in the SPG transaction. Depending
on the amount of the Hughes liability, this feature of the
Brookfield transaction adds a
minimum of a dollar per share of comparative value.
Third, SPG's new proposal states that current shareholders will
receive a distribution of GGO, but no longer includes a SPG
commitment to purchase $250 million
of shares at $5.00 per GGO share,
capital required to maximize value for GGO shareholders. This
does not surprise us in light of the fact that GGO's master planned
communities and other assets are not consistent with SPG's strategy
or expertise.
Valuation of the SPG Recapitalization Proposal
We note that the SPG recapitalization also will be subject to
FTC review. If the FTC prohibits SPG's purchase of GGP, the
probability of failure of SPG's allegedly "passive" recap
investment in GGP increases markedly. One should never seek
reinsurance from a carrier whose risks are perfectly correlated
with one's primary insurer. The same logic applies here.
The SPG recap proposal suffers from other serious shortcomings.
It is self-evident that after the FTC has failed to approve
an SPG takeover, SPG's ability to attract other participants to
invest in a GGP recap at $11.00 per
share will be even more remote. We note that SPG's recently
revised recap proposal no longer includes any of the original SPG
recap investors: Paulson & Co. Inc., ING Clarion
Real Estate Securities, L.P., Taconic Capital Advisors L.P., Oak
Hill Advisors L.P. and RREEF America L.L.C. have gone home.
Furthermore, SPG provides only a $2.5
billion equity commitment from Simon. SPG is no longer
willing to backstop the rest of the required capital or the debt
required.
The company should ask SPG where it will raise the balance of
the $8 billion of equity and debt
required for the plan of reorganization, particularly in light of
the likely requirement for SPG to be a forced seller of a material
amount, if not all, of its shares.
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. 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.
Trading Value of GGP in the Event of SPG Transaction
Failure
In the event of the failure of SPG's acquisition and
recapitalization proposals, GGP would be left without the capital
it needs to emerge from bankruptcy and, after the expiration of its
exclusivity period, will no longer control its own destiny.
Depending on market conditions at the time, the company may not be
able to generate any transaction alternatives to emerge. The
outcome for all stakeholders – creditors, shareholders, and
employees – would be uncertain at best, and potentially
catastrophic.
Regardless of what weightings one assigns to each of the three
potential SPG transaction outcomes, the expected value of the SPG
transaction is considerably less than the recapitalization option
offered by the Brookfield-sponsored transaction.
Valuation of the Brookfield Transaction
The valuation of the Brookfield
transaction will be determined by the future trading values of GGP
and GGO upon emergence from bankruptcy. Using Simon's cap
rate based on recent trading prices, adjusting for warrant
dilution, and taking into consideration the ability of GGP to
"clawback" up to $1.9 billion of
Pershing Square's and Fairholme Capital's $3.8 billion commitment and resell these shares
to institutional and retail investors in a traditional secondary
offering, we currently believe that GGP will trade at a stock price
comparable to that offered in the SPG acquisition.
Shareholders who seek cash for their shares can sell into the open
market to receive these values, while shareholders who wish to hold
their positions can participate in the long-term value creation at
GGP.
Unlike the SPG transactions, the Brookfield transaction provides a mechanism to
defease both the unknown Hughes Heirs' liability and $300 million of MPC tax liabilities. GGO
will also be a beneficiary of Brookfield's expertise in land development and
opportunistic real estate investment and development.
Pershing Square will be the largest shareholder with approximately
25% of the outstanding stock, affirming our commitment to the
future of GGO.
Most importantly, unlike the SPG transaction alternatives, the
standalone plan will have no antitrust risk and can therefore be
consummated in a timely fashion.
Finally, the standalone plan preserves flexibility for GGP to
consummate a strategic transaction in the future. If there is
to be a business combination between GGP and SPG, let it be after
emergence and not in a fire sale. The successful auctioneer
understands that any buyer who constantly raises its offer without
ever receiving a counterproposal from a seller, reveals a
willingness to pay an even higher price in the future.
Certainty
GGP's bankruptcy is one of the most successful in history.
For GGP to hand over its keys to its main competitor subject to
government approval is reckless in our view. SPG has as much,
if not more, to gain from the destruction of General Growth than
from its acquisition.
Despite months of discussions, SPG still refuses to take full
financial responsibility for the antitrust risk of its bid.
The reason is obvious. SPG and General Growth are, by far,
the first and second largest mall owners in the country, with
control of over half of all premium, "A"-quality malls. Any
significant transaction with SPG could raise serious antitrust
concerns. At a minimum, we would expect the antitrust
authorities to conduct a full investigation, delaying the
transaction for months. Indeed, the FTC continues to
scrutinize Simon's $2.3 billion
proposed acquisition of Prime Outlets Acquisition Co.'s outlet
shopping center operations -- an acquisition that was announced
almost six months ago. Such delays expose General Growth to
capital market risks, higher administrative costs, the loss of
opportunities, and human capital flight.
Experience teaches that transaction certainty principally relies
on the choice of a transaction partner, not in the documents.
There are many months remaining before GGP's emergence.
Brookfield, Fairholme and Pershing
Square are highly incentivized to achieve a successful
reorganization of GGP. SPG is a chief competitor and benefits
from GGP's failure. This alone is sufficient reason for the
Board to decide in its business judgment not to put the company in
a position where the only sponsor of its exit from bankruptcy is
its chief competitor.
Respectfully,
William A. Ackman
SOURCE Pershing Square Capital Management, L.P.