Bill Ackman and General Growth Properties

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Bill Ackman, the billionaire hedge fund manager has decided to go passive on General Growth Properties (NYSE: GGP), dropping his on-going push for the sale of this mall operator. He agreed to sell warrants to buy 18 million shares of General Growth to Brookfield Asset Management (NYSE: BAM) at around $15 per warrant, bringing to Ackman around $270 million. The warrant would allow Brookfield to buy General Growth’s stocks at less than $10 per share, more than 50% discount from the current trading price of $19.27 per share.

Best Ackman Investment

Bill Ackman first invested in General Growth several years ago when the company was on the verge of bankruptcy. He put around $60 million into the company to buy General Growth’s shares at around 35 cents per share in late 2008. In the bankruptcy process, Ackman stated that Pershing Square had contributed more than $1 billion of capital, raised $2.6 billion from Fairholme Funds and additional $500 million from the Blackstone Group. This restructuring deal could be considered to be the most successful ever for Bill Ackman. The estimated return for General Growth’s investment was very juicy, of 77-fold, including the value of Rouse spin-offs, dividends and Howard Hughes. After the warrant sale, he would still own 8% stake in General Growth.

General Growth with Great Potential

General Growth is the second biggest mall operator public REIT, just after Simon Property Group (NYSE: SPG). It currently has interests in 143 regional shopping malls, with around 135 million square feet of leasable area including Ala Moana Center in Honolulu, Water Tower Place in Chicago, and Tyson’s Galleria in Washington DC.  In Bill Ackman’s presentation to the value investing congress, he mentioned that General Growth had generated around $533 tenant sales per square foot, with 70 Class A malls, accounting for more than 70% of NOI. There were three reasons to show that General Growth was a good business including growth, stable free cash flow, and high barriers to entry. Indeed, General Growth had long-term lease life, of around 8 years on average, with rollover of 10%-15% of leases per annum, whereas the fixed-rate debt was around 90%. The majority of its revenue was recurring, accounting for 85% of the total revenue. In addition, General Growth had a diversified customer base, as the largest tenant represented less than 3% of the total revenue, along with its geographic diversification. Furthermore, it was hard for other to new entry to compete with General Growth due to the limited supply and the difficulty to acquire new high quality locations.

The Sale Couldn't be Completed

As Brookfield’s interest has been raised from 28.3% to 42.2% stake in General Growth, Bill Ackman worried that with the anti-dilution characteristics of Brookfield’s warrants, and the share buybacks, Brookfield de facto controls the company, meaning that without paying the premium, Brookfield could take over General Growth. Thus, he played a matchmaker role between General Growth and Simon. Ackman said that the deal might push the stock up by 50%. Even though Bill Ackman said that David Simon was very interested in buying General Growth, Stephen Sterrett, Simon’s CFO has confirmed: “We have not made an offer for General Growth or its properties since 2010, during GGP’s bankruptcy, nor have we subsequently agreed on any value for the company.” So Ackman has agreed to be the passive investor in General Growth, and to limit its ownership to 9.9% maximum. Brookfield also agreed to cap its ownership at 45%. 

Foolish Bottom Line

General Growth is paying 2.2% dividend yield, and is valued at 18.9x EV/EBITDA, lower than that of Simon, 21.38x EV/EBITDA. I still believe in the long-term potential of General Growth with its second leading position in mall operating business and the frequent cash flow it generated. However, with the pricey valuation, General Growth would not be in my personal portfolio at the moment.  




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