Simon Property Group's vision of expanding its shopping mall empire by 50 percent in one deal faded Friday when the Indianapolis developer pulled out of the bidding for bankrupt rival General Growth Properties.
Simon's withdrawal, after nearly three months of bidding, came after General Growth snubbed Simon's "best and final" offer during a bankruptcy court hearing in New York and got the judge to agree to a competing recapitalization plan that leaves General Growth independent.
The hearing left Indianapolis-based Simon, the nation's largest retail landlord, thwarted in its bid to control its next-biggest rival, despite dangling several sweetened offers before its board and creditors.
"They made a valiant effort to buy the No. 2 player in the industry. This was the big fish that got away," said Benjamin Yang, a retail analyst with the San Francisco investment firm of Keefe, Bruyette & Woods.
Simon's final offer, made Thursday with partner Blackstone Group, had a value of $33 billion. That included taking over about $20 billion in mortgages on General Growth's properties.
Fears that Simon would have grown too big by swallowing General Growth, thereby triggering federal antitrust objections to the deal, may have been the undoing for Simon. Its bid was worth $5 more per share than the $15-a-share competing recapitalization plan by a group led by Toronto-based Brookfield Asset Management.
"Given antitrust concerns, General Growth decided the premium price wasn't enough to go with Simon," Yang said.
U.S. Bankruptcy Judge Allan Gropper approved the Brookfield plan, which would give it, Fairholme Capital Management and Pershing Square Capital Management warrants to buy stock in the reorganized company in exchange for financing it needs.
In comments tinged with disappointment, Simon Chairman and Chief Executive David Simon said General Growth's decision to reject Simon's bid in favor of Brookfield's plan "is a truly unfortunate result for all GGP stakeholders."
"We are disappointed that the GGP board hastily decided in less than 24 hours to accept substantially less value, rather than take more time to fully assess the benefits of (Simon's) offer," he said in a statement.
The judge-approved plan should enable General Growth to emerge from Chapter 11 bankruptcy protection as a standalone company using $6.5 billion from Brookfield and the other investors.
The Brookfield deal includes a break-up fee that would give it and its partners hundreds of millions in stock warrants if General Growth went with another bidder.
With 382 shopping center properties, Simon could have gained control of up to 200 more with its bid for General Growth. Some retail experts say the combination would have given Simon unparalleled leasing clout in the retail industry that could have put it in a position to dictate financial terms to department stores and smaller retailers.
General Growth's properties are among the most desirable in the industry. They include Water Tower Place in downtown Chicago; Tysons Galleria in McLean, Va.; Faneuil Hall in Boston; and the Ala Moana Center in Honolulu.
General Growth got deeply into debt, which it couldn't make payments on, by buying festival marketplace developer Rouse Co. for $11 billion in 2004.
Simon's pullback leaves a cash-rich company looking for a way to grow at a time when commercial real estate values are still falling.
The publicly owned company reported last week it has $3.6 billion in cash on hand and $3.2 billion available on its credit facility.
"Simon has a lot of liquidity they have to address," Yang said. "Simon certainly will be well-positioned to take advantage of those opportunities" to make future acquisitions, he said.
But none will be the size of General Growth. Simon told stock analysts and others in a teleconference last week that the General Growth bidding had taken up the majority of his time in the past several months.
With that bid now off the table, "we will continue to focus on our business and evaluate other opportunities in the marketplace," he said in a statement.