General Growth Nabs $4 Billion to Fend Off Simon

Mall operator General Growth Properties (GGP), which is currently in bankruptcy, has been fighting an unsolicited $10 billion bid from rival Simon Property Group (SPG). Now it looks like General Growth has a viable alternative for its investors. The company has secured nearly $4 billion to recapitalize its balance sheet.

The backers are General Growth's largest unsecured creditor, Fairholme Capital Management, and Pershing Square Capital Management, which is the biggest shareholder. These firms will also each invest $62.5 million in a rights offering to fund the spin-off of General Growth Opportunities, which holds riskier assets.

At the same time, General Growth has $2.6 billion in backing from Brookfield Asset Management.

Adding things up, General Growth will be able to pay off the $7 billion in outstanding unsecured debt and also offer $10 per share for the equity. The company will have time to work out the details as the bankruptcy court has allowed four more months for the reorganization.

Mall Wars

When General Growth declared bankruptcy in April 2009, the situation seemed dire. The company had a strong portfolio of malls across the country but an upside-down capital structure, which included a crushing $27 billion debt load.

Savvy investors -- like Pershing's William Ackman -- saw lots of value and began to scoop up distressed securities. The payoffs were substantial and General Growth turned out to be one of the best trades of the past year.

The company was also attractive to other mall operators, especially Simon. A deal between the two would create an empire of 550 malls, accounting for a third of the U.S. market.

Besides generating strong cash flows, Simon's massive platform would also provide more leverage to negotiate rents. True, this would take time because leases can run for ten years or more. But the long-term earnings potential would be strong.

And what about the antitrust issue? Simon is not concerned about this, mainly because consumers have many alternatives for shopping, such as e-commerce.

Backers Signal Bright Future

The backing of Fairholme and Pershing greatly improves General Growth's chances of staying independent. It's also a sign that the investors see much more upside ahead. Then again, General Growth has more than 200 malls, many of which are upscale like Tysons Galleria in McLean, Va, and South Street Seaport in New York City. Plus, the company has made great strides in restructuring its debt.

Of course, the deal will put pressure on Simon to get more aggressive with its own bid. It also means that another possible bidder, Westfield, will probably avoid the fight because of the high cost.