Simon Properties offers General Growth $10 billion buyout

LAS VEGAS, Nevada -- Even if Simon Property Group's hostile bid to take over bankrupt rival General Growth Properties goes through, local consumers probably wouldn't notice many changes inside the local shopping centers the two companies operate, experts said Tuesday.

"Both companies are well-known in the Strip retail market, both have great relationships with tenants that occupy spaces in these types of facilities, and both have competent management," said John Knott, executive vice president of the local office of commercial brokerage CB Richard Ellis and an expert on Strip real estate. "The transition should be seamless."

Simon Property Group, the nation's largest shopping mall owner, made a $10 billion hostile bid Tuesday to acquire ailing General Growth Properties.

The acquisition would allow General Growth, the country's No. 2 owner of shopping centers, to emerge from Chapter 11 bankruptcy protection. General Growth filed for bankruptcy last year after buckling under the weight of billions in debt it racked up during a massive expansion effort fueled by cheap credit.

In Las Vegas, General Growth owns the Boulevard and Meadows malls off the Strip. Along the resort corridor, the company owns the Fashion Show mall, the Grand Canal Shoppes at The Venetian and the Shoppes at Palazzo. General Growth also owns The Howard Hughes Corp., which is developing Summerlin. A major regional mall the company was building at Summerlin Centre is on indefinite hiatus.

Simon's Las Vegas portfolio is considerably smaller, but it includes one of the nation's best-performing shopping centers. Its Forum Shops at Caesars has long tallied some of the highest sales per square foot among U.S. malls. Simon also operates downtown's Las Vegas Premium Outlets and the Las Vegas Outlet Center on South Las Vegas Boulevard.

The move would be Simon's second major acquisition in three months. In December, Simon offered $700 million in cash and stock to buy more than 60 outlet shopping centers from another competitor, Prime Outlets Acquisition Co.

Simon is using its comfortable cash cushion and credit lines to take advantage of falling commercial property values, which are off 40 percent from their peak in 2007. And General Growth has some prized centers, including the Glendale Galleria in Southern California and the South Street Seaport in Manhattan.

The buyout would boost Simon's clout in the Las Vegas retail market, but Knott said market forces would check any big player. For example, Simon could ask a tenant who is seeking space at the Forum Shops to also lease space at Fashion Show, but any operator that charges too much for rent could lose out as tenants go out of business. That natural equilibrium - plus high-end Strip competitors including MGM Mirage's Crystals at CityCenter and Mandalay Place at Mandalay Bay - doesn't leave even the biggest player much leeway to act alone.

Off the Strip, General Growth's properties might not seem to fit Simon's high-end resort image, but Simon tends to hold malls for the long term, Knott said. It's unlikely that Simon would sell the Meadows or Boulevard malls unless another buyer offered a "compelling" price for the assets, or Simon needed to pay down debt, Knott added.

"There is a place for the Meadows and Boulevard. They're both good facilities, and Simon could do a good job with them," he said.

Nor does Knott expect Simon to sell off the mall at Summerlin Centre. The market isn't ready for such a shopping center now, but the local economy could recover enough to make a 2014 opening possible.

The real immediate value in the buyout, Knott said, is in helping determine pricing points for the city's larger assets and commercial properties.

"In our market right now, trades that include real estate are a good thing. They give us value points for major properties and companies," he said. "And it's good to just see someone else seeing value in real estate, even if it involves a troubled company trying to figure its way out of bankruptcy."

The offer for General Growth would fully repay $7 billion to General Growth's unsecured creditors and $3 billion to shareholders. Stockholders would get $6 a share in cash and $3 a share in other assets. An article in The Wall Street Journal said Simon would pay stockholders after it spins off General Growth's residential-development division, which includes the Hughes Corp. and its Summerlin master plan, as a separate company.

The offer, however, might be amended so shareholders could receive Simon stock instead of cash.

Simon made the public offer after General Growth executives failed to make a "substantive response" Simon's overtures.

"Simon's offer provides the best possible outcome for all General Growth stakeholders," David Simon, chairman and chief executive officer, said in a statement.

Though the official committee for General Growth's unsecured creditors has backed the deal, stockholders appeared to be looking for a sweeter offer from Simon or one of its competitors. Shares in General Growth shot up nearly 21 percent, or $1.97, to $11.37 in midday trading on the Over-the-Counter Bulletin Board. The shares closed at 12.02, up $2.62, or 27.87 percent.

Sandler O'Neill & Partners analyst Alexander Goldfarb said he expects other offers to drive the bidding higher.

"General Growth has a number of options," Goldfarb said. "This is not the only one."

A spokesman with Chicago-based General Growth had no immediate comment.

Simon, unlike many of its competitors, has been able to weather the economic downturn thanks partly to its higher rents. The Indianapolis-based company owns more than 380 properties, including the Houston Galleria and the Fashion Valley Mall in San Diego.