By KRIS HUDSON And MIKE SPECTOR
Shopping-mall owner General Growth Properties Inc. on Sunday selected as its preferred option for exiting bankruptcy a revised proposal led by Brookfield Asset Management Inc. over a competing offer from rival mall giant Simon Property Group Inc., a person familiar with the matter said.
General Growth Properties' Woodlands Mall in The Woodlands, Texas
But the situation is fluid and a few details remain to be ironed out Monday before the deal can be finalized, a separate person familiar with the talks said late Sunday.
The decision by General Growth's board is the latest twist—but perhaps not the final one—in months of competition between the Brookfield group and Simon over which suitor would get the nod to finance General Growth's bankruptcy exit in exchange for much of the company's stock. General Growth, which owns 204 U.S. malls, sought bankruptcy protection in April 2009 to restructure its $27 billion of debt and intends to emerge later this year.
The situation may yet change again, as Simon and other investors that it has recruited are expected to review Brookfield's proposal and perhaps submit another revised bid ahead of a pivotal hearing in the bankruptcy case set for Wednesday. Simon has said it remains interested in acquiring General Growth in its entirety if a deal can be struck.
Still, Simon has pursued General Growth as something of an outsider, given that General Growth has talked with Brookfield about various deals since the months leading up to General Growth's April 2009 bankruptcy filing. Some in the Simon camp have complained General Growth seems determined not to do a deal with Simon because it is a competitor, though Simon's recapitalization offer is better than Brookfield's on some points.
Simon, the largest U.S. mall owner with 321 properties, has pursued General Growth since first suggesting a buyout in an informal meeting with General Growth last August. In February, Simon made a $10 billion buyout offer that General Growth rebuffed in favor of studying other options. Then Simon switched to trying to beat Brookfield's proposal to help finance General Growth's bankruptcy exit as a standalone company.
The Brookfield group, which includes General Growth investors Pershing Square Capital Management LP and Fairholme Capital Management, proposed in early April to provide General Growth with $6.5 billion to pay its unsecured debts in exchange for two-thirds of the company's stock when it exits bankruptcy.
In exchange for its contributions, the Brookfield group required warrants to buy an additional 120 million General Growth shares. The value of those warrants is estimated at $500 million to $900 million.
The Brookfield deal approved Sunday included a few revisions. Brookfield, Pershing and Fairholme will buy General Growth stock at $10.50 rather than the original price of $10, according to a person familiar with the matter.
In addition, some of the warrants will vest over the next seven months. The group will get 60% of the warrants if and when the judge approves the deal, and the remaining 40% will vest between then and Nov. 30.
Simon's effort to undermine Brookfield's offer entails matching it and recruiting other investors, including Paulson & Co., to help it raise billions of dollars for General Growth. Simon proposed last month as its deal clincher that it would forego the warrants, gambling that the Brookfield camp would be unwilling to do so.
Simon also made concessions like pledging to hold its voting stake in General Growth to 10% though it would own 25% of the shares.
Ultimately, Brookfield, Pershing and Fairholme didn't agree to forego the warrants, but they did agree to the higher price for their investment and to slightly delay the vesting of the warrants. That helped sway General Growth's board, which already was concerned about the ramifications of allowing Simon, a chief competitor, to own a large stake in the company.
Brookfield, a Canadian property investor, owns considerable office properties in the U.S. but little retail property, so it isn't a competitor to General Growth.
General Growth now faces a hearing on Wednesday—unless the date is further delayed—in which U.S. Bankruptcy Court Judge Allan Gropper is to determine whether the Brookfield proposal will get "stalking horse" status, making it the bid that others must top. The Brookfield's proposal stipulates that Brookfield, Pershing and Fairholme start getting the warrants as soon as their bid is deemed the stalking horse.
For its part, Simon has said it will drop out of the bidding if it doesn't win stalking-horse status instead of Brookfield. That is partly because, once the Brookfield team gets its warrants, any subsequent acquirer of General Growth would be faced with paying the trio several hundred million dollars to retire those warrants. Thus, any further revised bid by Simon likely would be made prior to the Wednesday hearing.
If Simon drops out, General Growth will proceed with other aspects of the Brookfield plan once Judge Gropper has approved it. That includes arranging to raise more capital by selling additional shares to institutional investors, perhaps including some of those that had joined Simon's bid.
Once General Growth exits bankruptcy, it plans to split into two companies. The larger company, which would retain the General Growth name, will own most of General Growth's malls. That is the company in which the Brookfield group would buy stock for $10.50 a share. The smaller entity would hold riskier assets, such as General Growth's residential-development business and a few malls worth less than their mortgage amounts.
The larger company still would carry nearly all of General Growth's $20 billion of mortgages for which its malls are pledged as collateral. Brookfield also has lined up banks to provide a $1.5 billion loan General Growth was seeking—something Simon had pledged to provide on its own.
Brookfield's earlier proposal stipulated that Brookfield, Fairholme and Pershing were to receive several hundred million new General Growth shares, making them owners of two thirds of the company's stock once it exits bankruptcy. However, the revised price will lower that percentage. The three also would collectively provide up to $250 million to finance the smaller spin-off company.
For General Growth, the dueling Simon and Brookfield offers marked a significant comeback from the company's dire straits of the past two years. General Growth's stock hit a closing low of 33 cents in early March 2009 as bankruptcy loomed.
Then, in recent months, the global capital markets improved and General Growth restructured and extended the due dates of nearly all of its $20 billion of mortgages. The stock steadily rose, closing at a high of $16.80 on March 22 of this year. The stock closed Friday at $15.70.
General Growth's turnaround happened in the charge of two former board members—Adam Metz as chief executive and Thomas Nolan as president and chief operating officer. The two took executive posts in late 2008, ousting former CEO and founding family scion John Bucksbaum after discovering that his family trust had made loans to two General Growth executives without informing the board.
Messrs. Metz and Nolan "deserve a lot of credit," said Alexander Goldfarb, an analyst with Sandler, O'Neill + Partners. "They've turned an almost fatal situation into an incredible turnaround. They did a lot of smart things and got the company into a situation where it has a strong negotiating position."
Write to Kris Hudson at kris.hudson@wsj.com and Mike Spector at mike.spector@wsj.com
