Brookfield says Simon plan would hurt General Growth

(Bloomberg) — Simon Property Group Inc.'s plan to invest in bankrupt rival General Growth Properties Inc. raises antitrust concerns that would hurt the mall owner after it reorganizes, Brookfield Asset Management Inc. said.

A plan by Brookfield and its partners, Fairholme Capital Management LLC and Pershing Square Capital Management L.P., to bring General Growth out of Chapter 11 bankruptcy is less risky than the competing proposal by Simon, Brookfield Chief Executive Officer J. Bruce Flatt said in a letter to General Growth executives. Flatt said his group won't proceed without being issued warrants that Simon has excluded from its offer.

"We believe that a significant toe-hold position by GGP's largest direct competitor will be a material ongoing impediment to the prosperity of the company," Flatt said in the letter, obtained by Bloomberg News. In addition to "actual and perceived conflicts" from the stake, "a significant shareholding by Simon will inevitably create uncertainty as to whether GGP will remain an independent company for any length of time," he said in the seven-page letter, dated Monday.

Simon Property, the biggest U.S. mall owner, was spurned in a takeover attempt of its largest rival. Last week it offered instead to invest $2.5 billion in a reorganization of Chicago-based General Growth, matching the terms of the plan by Brookfield and its partners.

Reorganization Plan

General Growth last month asked the U.S. Bankruptcy Court in Manhattan for approval to reorganize with a $6.55-billion investment from Brookfield, Fairholme and Pershing Square that would give the three investors a 65 percent stake in the mall owner. A hearing is scheduled for April 29.

Simon, based in Indianapolis, said its new proposal is better for General Growth shareholders than the Brookfield plan because it doesn't include issuing warrants that may dilute stock value. The warrants' removal would provide shareholders a benefit of at least $895 million, or $2.75 a share, Simon said. General Growth puts their value at about $519 million.

"SPG's offer is firm, fully financed and economically superior because it would not include expensive and highly dilutive warrants," Simon said Tuesday in a statement. "In addition, SPG strongly believes its passive minority stake with numerous procedural and governance safeguards does not pose any concern for the stakeholders of General Growth."

Warrants Needed

Simon may be trying to pressure Toronto-based Brookfield into withdrawing its plan or giving up its warrants, Flatt said in his letter to General Growth. The warrants are needed "as consideration for the role that we have and continue to play" in assisting the mall owner and its shareholders, and Brookfield "will not participate further" without them, he said.

Katherine Vyse, a spokeswoman for Brookfield, said the letter was sent to General Growth on Monday. She declined to comment further. David Keating, a spokesman for General Growth, said he had no immediate comment.

Flatt's comments are similar to those made by Bruce Berkowitz, founder of Miami-based Fairholme, in an interview Friday. Berkowitz said a Simon investment in General Growth "is not healthy for competition" and that the warrants are needed as compensation for his commitment to the mall owner.

In his letter to General Growth, Flatt said Brookfield's plan carries more certainty than Simon's because of the anticompetitive issues raised.

"At a minimum, regulators would likely conduct a full-scale investigation into the threat to competition posed by Simon's proposal, delaying the transaction for months," Flatt said. "For this reason alone, the Simon proposal is not a viable equity capital commitment for the company."

Subject to Scrutiny

Even if such a holding in General Growth were allowed by federal regulators, "a minority investment by its primary competitor will result in the company's ongoing operations being subject to scrutiny on an ongoing basis for anti-competitive behavior," Flatt said.

Simon Property, in its statement Tuesday, said "the only anti-competitive behavior here is the Brookfield group's transparent and self-serving effort to prevent competition for the best GGP recapitalization."

Simon CEO David Simon has said retail real estate in the U.S. is too fragmented to cause any antitrust issues even if Simon were to buy General Growth outright. He said last week he is still interested in taking over the company completely after his original $10-billion takeover bid was dismissed as too low.

General Growth filed the largest real estate bankruptcy in U.S. history a year ago after amassing $27 billion in debt making acquisitions.