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The SiriusXM Lesson: Thriving Stocks Left for Dead During the Crisis

Ackman fuels General Growth with Simon Property M&A carrot

A similar dynamic to SiriusXM is playing out in Bill Ackman's balance sheet and real estate recovery bet on General Growth, and a newly launched proposal for shareholders to push for the company's sale to Simon Property. The goal is to sell the mall operator to Simon Property, netting shareholders a premium to what 40%-plus shareholder Brookfield Asset Management would pay for a majority stake.

In August, Ackman said in a letter to General Growth's board that the company should cement its impressive emergence from bankruptcy by selling itself to Simon Property Group, in a deal that could be worth in excess of $26 billion. Ackman owns more than 10% of General Growth's shares, making his fund the company's second-largest shareholder.

A potential deal comes amid a real estate sector M&A drama that's been thickening since General Growth's 2009 bankruptcy and its 2010 re-emergence; however, General Growth shares are far below the $28 share price that Ackman calculates might be reached in a merger.

Simon Property's prospective acquisition of General Growth would thwart a takeover by real estate giant Brookfield Asset Management (BAM) -- General Growth's top shareholder -- which Ackman argues would come without a control premium, in the letter filed with the Securities and Exchange Commission.

The drama marks what could be a turning point in General Growth's emergence from bankruptcy and an impressive 50% stock surge in the past year, on optimism about a widespread real estate recovery.

In the letter , Pershing is asking that General Growth hire financial advisers to cement a previously discussed merger with Simon Property, as Brookfield tries to take control of the company through ordinary stock purchases and warrant contracts.

Pershing and Brookfield were instrumental in pulling General Growth out of bankruptcy -- recapitalizing the company, raising $2.6 billion from the Fairholme Funds and $500 million from private equity giant Blackstone Group (BX).

For Pershing, the deal has been a huge windfall. In its letter, Pershing said it's made a near 80-fold return on its investment since the fall of 2008 when it bought into General Growth at an average price of $0.35 per share. Some moves like the 2010 spinoff of Howard Hughes Corp (HHC) and a general recovery have bolstered the investment.

In 2011, Ackman said he structured a takeover deal for General Growth with David Simon of Simon Property, worth nearly $20 billion. In the deal, General Growth shareholders would receive 0.1765 of a share of Simon stock -- at the time trading at $115 and valuing the company at $21, a 65% premium. Were that exchange offer to remain in a Simon Property merger at present share prices, Ackman calculates that General Growth could be valued at $26.3 billion.

After fending off what were considered opportunistic takeover bids, General Growth had a 2010 initial public offering and sold off assets. Now as shares hover near $20 and Ackman's ready to support a deal with Simon Property, he even says he's willing to sell his stake to Brookfield at over $19 if Simon is blocked from a prospective deal.

And there's a hitch. Brookfield, which is adding to its General Growth stake, isn't supportive of a sale to Simon Property and instead would rather acquire the company itself. In November, Ackman says Brookfield proposed it take General Growth over and sell off assets to Simon Property. Brookfield would finance the deal with proceeds from the sale of 68 General Growth's malls to Simon.

However, in April of this year, Pershing notes Simon Property rejected the deal on pricing concerns. Subsequently, Brookfield began buying up General Growth shares.

Brookfield has gone from owning 29% of the company at emergence from bankruptcy to 42.2% today, notes Pershing in its letter. "It is only a matter of time before Brookfield de facto controls the company," warns Pershing in the letter. "[If] control of the company is ceded to Brookfield, shareholders will suffer enormous and irreparable harm for they will lose the ability to capture an appropriate control premium for their shares.

Where are they now?: While the prospect of a big premium deal is a new catalyst for General Growth shares, investors are skeptical. Meanwhile, Ackman ended August with a second letter to General Growth's board indicating he could sell his stake to Brookfield at less that $20, effectively giving it control of the company if it doesn't launch a sale process.

For investors, it remains to be seen whether Simon would be willing to pay much in excess of current share prices, signaling there's little reason to expect a big payoff from here.
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