reuters ggp update #3
UPDATE 3-General Growth backs Brookfield bid, Simon may walk
* Gives GGP flexibility in talks with Simon
* Pershing Square to forgo interim warrants
* GGP hopes move won't end dialogue with Simon
* Simon likely to walk away from bid -source
* GGP off 2.5 pct, Simon up 1.8 pct (Updates throughout with new sourcing, details, background, share price)
By Paritosh Bansal and Ilaina Jonas
NEW YORK, May 7 (Reuters) - General Growth Properties Inc (GGP.N) is set to ask a bankruptcy court on Friday to approve an investment led by Brookfield Asset Management Inc (BAMa.TO), after reducing a related warrants package by 14 percent.
The move is a setback for Simon Property Group Inc (SPG.N), which raised its bid late Thursday for General Growth, hoping its "best and final" offer would persuade the target to favor its deal. [ID:nN06101794]
General Growth President Thomas Nolan, who was at the bankruptcy court in Manhattan, said the board voted telephonically on the move early on Friday, confirming an exclusive Reuters report that General Growth was going to stick with Brookfield.
Nolan told Reuters the company notified Simon Chief Executive David Simon, who was disappointed.
"We hope that doesn't end the dialogue," Nolan said.
"This is just the beginning of the process. This is not the end of the the process," he said, adding that the company will be seeking other bidders as well.
Simon is likely to walk away, however, if the court approves the warrants, a source familiar with the matter said.
General Growth believes that court approval of the Brookfield-led investment would protect its downside and give it greater flexibility in negotiating with Simon, which has offered $6.5 billion for all of the company, another source familiar with the matter said early on Friday.
But General Growth understands that the warrants, worth several hundred million dollars, would make a competing bid more expensive and so it would be willing to negotiate with Simon on a price that adjusts for them, the source said.
A court-approved deal with Brookfield gives General Growth room to negotiate on antitrust issues with Simon that could arise from a merger of the two largest U.S. mall owners, the source said.
The sources declined to be named because the talks are not public.
ACKMAN'S ROLE
William Ackman's hedge fund Pershing Square Capital Management, which has committed to invest in General Growth alongside Brookfield, also confirmed the Reuters report, saying it agreed to forgo interim warrants to purchase 17 million shares. It said the move meant giving up $128 million of value.
Pershing Square said it was agreeing to forgo the warrants on the condition that the bankruptcy hearing would proceed and that warrants would still be issued to Fairholme Capital Management, the other investor in the group, and to Brookfield, as previously contemplated.
Ackman, who owns about a quarter of General Growth, said this would align his interests with other shareholders and eliminate the potential for the appearance of any conflict.
Still, the bankruptcy court's approval would get Ackman off the hook on interim protections Pershing Square agreed to provide to Brookfield as part of the Canadian firm's investment commitment.
Under terms announced in February, Pershing Square was obligated to pay Brookfield 25 percent of its profits from its investment in General Growth above $12.75 per share if the company did a deal with another party at more than that price.
Simon, teaming with Blackstone Group (BX.N), offered to buy General Growth for $20 per share, or $6.5 billion. It also offered to pay holders of $7 billion of General Growth unsecured debt in cash and assume about $18 billion in mortgages and other property-level debt.
Brookfield, Fairholme and Pershing have offered to make a $6.55 billion equity investment and $2 billion capital backstop to help General Growth exit bankruptcy protection.
That plan values a core General Growth at $10 per share, and envisages creation of a new entity to house certain non-income producing assets.
The entity, General Growth Opportunities, is being valued at $5 per share, and has been given that value by Simon under its offers as well.
General Growth's shares were off 2.5 percent at $15.45, while Simon was up 1.8 percent at $86.37, both during morning trading on the New York Stock Exchange. (Additional reporting by Dan Wilchins; Editing by Derek Caney and Steve Orlofsky) (For more M&A news and our DealZone blog, go to www.reuters.com/deals)
