The next round of the bout between Simon Property Group Inc. and General Growth Properties Inc. will take place in the bankruptcy courts, where there is "very little" history or case law guiding the judge's decision making, according to a Simon executive.
"Put the war of words aside," Simon Executive Vice President and CFO Stephen Sterrett said during a Feb. 22 address at the University of Virginia's Darden School of Business. As General Growth attempts to solidify a recapitalization plan and seeks another extension of the exclusivity period to submit it, General Growth's unsecured creditors, faced with a "viable" offer from a stable company, will clamor for a settlement, he said. "In most bankruptcies, you're looking at partial realization for the unsecured creditors. This, we're talking about not only full realization for the unsecured creditors, but value for the equity holders as well. So the judge is kind of in uncharted territory as to what they might do."
Following the address, Sterrett told SNL that General Growth assets have "massively underperformed" since the company entered bankruptcy protection. "I think we're buying it at a fair price, but at the trough of earnings, and if the economy recovers … we should be able to grow the incomes."
Sterrett appeared confident of the terms of the proposed takeover, even as he noted that the majority of merger and acquisition activity is unsuccessful in the long term. "One of the hallmarks of our company, and one of things we were able to demonstrate, was a core competency to underwrite, execute and then assimilate other portfolios and other companies," he said in his talk. In its history, Simon has completed eight major portfolio acquisitions, and in each of them "we've hit the numbers," he said. "Every one of them has furthered the franchise in some way, shape or form. We might have overpaid for one or two, so I don't know that I'd say we're 8 for 8 — but we're pretty close to 8 for 8."
If Simon were to take over General Growth, Sterrett said there will not likely be justification for a regulatory clampdown due to the competitive nature of retail in the U.S. and the availability of alternatives for retailers. "I would argue that retail is one of the most competitive, one of the most dynamic industries in the United States," he said. "If you add all the Simon, General Growth — if you probably added up all the regional malls in the United States — you may not get to 10% [of retail market share]."
Addressing questions from the audience related to the particulars of Simon's proposal, Sterrett said the offer is "a bit unique" in that there are different constituencies to appease. "There are some banks who just want to get paid and go home. There are some traditional bond investors who are the same way," he said. "But there are clearly some people who own the debt, who are more excited about getting it converted to equity than getting paid in cash."