Brookfield, Simon Spar Over Fees, Anti-Trust

Simon, which also filed an objection in GGP's bankruptcy case Thursday, said it has been joined by Paulson & Co., ING Clarion Real Estate Securities, Oak Hill Advisors, RREEF and Taconic Capital Advisors, which have committed to invest a combined $2.1 billion in GGP.

On April 14, after a $9 per share takeover attempt was rejected, Indianapolis-based announced another bid to acquire GGP, which has been working on a $6.5-billion reorganization plan in bankruptcy court with assistance from investors such as Brookfield. Simon promised to match the Brookfield plan "but on a basis very substantially more favorable to GGP and its equity holders."

Basically, the war of words has now focused on whether Simon is just trying a back-door takeover, and if Simon's offer is sweeter without more than the half a billion dollars in fees required by Brookfield's bid.

J. Bruce Flatt, CEO and senior managing partner with Toronto-based Brookfield, said in a letter to GGP officials this week that Simon likely just wants to take over their company, and that Simon's offer could result in anti-trust trouble.

"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 his letter. "In addition to the unnecessary obstacles that GGP would have to overcome due to actual and perceived conflicts in the pursuit of corporate opportunities and in making day-to-day decisions, a significant shareholding by Simon will inevitably create uncertainty as to whether GGP will remain an independent company for any length of time. It is hard to believe that Simon will be satisfied with the status quo when it could achieve major synergistic benefits by combining the two companies."

However, David Simon said in his letter Thursday that the company would limit its board representation to two people who don't even work for the company: Dale Anne Reiss, former senior partner and global Americas director with Ernst & Young LLP, and Peter Linneman, professor of Real Estate, Finance and Public Policy at the Wharton School of Business. Also, Simon's voting rights would be capped at 20%. Simon also had an argument for the anti-trust issue.

"According to recent estimates, there are over 100,000 shopping centers of all kinds in the United States containing approximately seven billion square feet. Moreover, in addition to the wide variety of physical stores, e-commerce websites and mail order catalogs have become established and powerful retail outlets. Only a small fraction of US retail sales are conducted in properties owned by SPG and GGP," Simon said. "SPG strongly believes that its proposal to take a passive minority stake, with numerous procedural and governance safeguards, and together with a group of highly sophisticated, experienced and independent investors, does not pose any concern for the stakeholders of GGP."

Cyrus Madon, Brookfield's senior managing partner responsible for restructuring and lending, responded that Simon's promise doesn't make any sense. "Would Pepsi allow Coke to become its largest shareholder?" he asked in a statement.

Simon has offered to acquire 250 million shares of common stock in GGP for $2.5 billion in the aggregate, or $10 per share, the same amount as Brookfield would acquire, at the same price. Simon said he would also enter into agreements on the same basis as Brookfield with respect to the recapitalization of GGP and the planned spin-off of a second distressed-asset class. Simon also said Paulson & Co. Inc. is prepared to co-invest $1 billion in connection with this plan. Simon said it expects to get other investor assistance for another $3 billion, and until those investors are named, the company will backstop that amount in its recent offer.

Simon also said it would not ask for fees, or warrants, in its proposal. Brookfield's plan requires fees from between $600 million to $900 million. Flatt said Brookfield will remove its funding if the fees are removed.

Also Thursday, Fairholme founder and Managing Member Bruce Berkowitz said his firm would pull its support if GGP reverses course and sides with Simon. "Our concern is not antitrust or execution risk. We are not experts in those areas. We simply find the value proposition for the public float unsupportable assuming successful execution of anything like the SPG proposal," Berkowitz said in a statement.