GGP, HHC the WSJ and David Simon

Remember that post I wrote on the WSJ and David Simon? Read it first here so that you are caught up. Well it sure seemed to ruffle a few feathers out there. Here is what happened since then..

The day after I wrote the piece (3/15) I sent the WSJ reporter, Kris Hudson an email simply stating:

Kris,

In your article yesterday there was an error in your pricing of GGP. You have to include the value of HHC, spun off from GGP at emergence priced at $67 a share yesterday. Figuring for the 10-1 reverse split in HHC, that gives current GGP a share price of over $21 a share

He replied back that David Simon’s comparison took into account the spinoff of HHC (or GGO/Spinco as it has been called at various times) so it “was a wash”. Further, he said was that since SPG’s share price had increased 25%-30% since then and GGP’s has not, GGP shareholders would have done better off under the SPG plan (this was David Simon’s assertion, he repeated it back to me). As regular readers know, the treatment of HHC under the two plans was totally different but rather than get into it with reporter whom I felt should have known this, I just let it go and dropped it.

He didn’t…

The next day I get the following email:

Thanks for your previous note. I see now that you neglected to include any of my reasoning in your subsequent column. After viewing your previous blog items on this subject, and the many swipes at the WSJ’s reporting therein, I now know better than to bother responding to you.

Let’s put aside the obvious implied thought process that “if you do not totally agree with me or criticize me I will not engage you” mentality. I would have thought a “journalist” would have relished the opportunity for discussion?? I can think of 25 bloggers off the top of my head who would have engaged in an honest attempt to get at the truth, not have their feelings hurt and take their ball and go home. Let’s also put aside that nowhere was it said that I was erroneous in my criticism (detailed in the linked post at the top you should have read first) just that because of the “swipes” I took at the WSJ’s shoddy GGP coverage (in the linked posts, not all of it) I did not deserve a response. If anyone is wondering why bloggers are becoming more relevant every day, this exchange tells you why. By bloggers I mean real bloggers, not someone who used to report for a major publication and now “blogs” for them. We do not sit in ivory towers talking at people, we sit with them and engage. There is a world of difference…..

So, in that spirit I replied to this one:

Kris,

If you look at the time stamp on the blog post you’ll notice that it was posted on 3/14…….a full day before I emailed you. That is why your comments were not included. I also did not include them because I felt your and David’s view were factually erroneous on the subject.

As I said in the piece it is impossible to know what the GGP Simon would have acquired would have looked like after divestitures and outside investors were called in to help Simon aside from the fact at $6.70 HHC now was only a $3 cash payment to GGP holders in his 1st offer. Therefore your assertions about them “both spinning HHC” were incorrect. The exercise he underwent was foolish, had no basis in fact and did not even follow the terms of his offers for GGP.

I felt that it should have been pointed out as such.

Regarding my other comments. Had GGP listened to previous WSJ reporting on the subject they would have taken SPG’s first $9 offer for GGP as “as good as they are likely to see” only to get $15 from BAM later.

For this reason I have found the reporting to be sided toward David’s opinion. For the record I have commended the gentlemen who do the video segments, they did an interview w/Nolan I thought was very good and at the time said so. This is also the first issue I have had with anything you have written.

Do not take anything personal, we just disagree…..it happens all the time in the online world

Pretty simple and again, I thought that would be the end of it since I did not expect either a response OR even for it to even be read but I wanted him to know he had the dates wrong on my post/email to him.

So, who do I hear from next???????? Drum roll……….

Mr. David Simon, CEO of Simon Properties.

Now, I am not a huge believer in coincidences especially on this level since Mr. Simon’s office called me a day and a half after my last email to the WSJ. After two years of covering the GGP saga and over 350 posts on it, many of them extremely critical of Simon and his offers, only after accusing the WSJ of parroting his viewpoint in an email to one it its reporters do I now get contacted. The optimist in me says Simon decided to check out what all the buzz was about my blog (not likely) and ran across the post. The pessimist in me says the WSJ is trying to curry more favor and access to Simon by “alerting” him to detractors so that he can contact them to set the record straight so to speak. I guess it all depends on how much you believe in coincidence. You can draw your own conclusions….

Anyway, this ain’t over yet…….

So on Monday morning the 21st. I sit down to talk with David Simon. He informs me in no uncertain terms (he was not rude) that his treatment of HHC in both his offers was “indentical” to the treatment in the BFP (Brookfield, Fairholme, Pershing) deal that the GGP board accepted. We decided to table the disagreement we obviously had over the GGP aspect and how he cannot simply say “my stock is up “x” since the attempted deal so yours would be also” and focus solely on HHC (actually “we” did not decide to, he refused to talk about the GGP part). He was apparently bothered at my assertion that he was being “disingenuous” in regards of the treatment of the HHC spin. I told him that the way I read the documents (and apparently the GGP Board did also) HHC was not being treated the same. He reiterated that they were, so, in wanting to be accurate, I requested he send me what he had in terms of his final offer and if a correction was needed, I would certainly do it (hey, maybe I missed something when I immersed myself in the GGP Chapter 11 24/7/365 for two years).

The following letter is what I received:

Letter to BOD of GGP FINAL – 05 06 10 (click to open. pdf)

Really? Honestly I was hoping for a court document and an additional letter detailing more terms. I posted this letter on the blog In May 2010!!

So, again, in an effort to make sure I am correct I email back saying:

Mr. Simon:

Thank you for the information…

From your 4/14 Letter to GGP:

“Consideration. Simon would acquire 250,000,000 shares of common stock in GGP for $2.5 billion in the aggregate, or $10.00 per share, the same amount as Brookfield would acquire, at the same price, pursuant to its Cornerstone Investment Agreement. Simon would also backstop the GGO rights offering as contemplated in the Brookfield sponsored recapitalization, and would otherwise enter into agreements on the same basis as Brookfield with respect to the recapitalization of GGP and the spin-off of GGO, subject to the adjustments for the benefit of GGP outlined herein.”

The last letter (5/6) you sent me simply says:

“SPG is prepared to acquire GGP for $20.00 per share, consisting of $5.00 in cash and $10.00 in SPG shares at their current value, and the distribution to GGP shareholders shares of General Growth Opportunities (GGO), which you have valued at $5.00 per share.”

The mention of the backstop of the GGO rights offering is omitted (in the 5/6 letter) and there is no mention of it anywhere else in the letter. We would get a distribution, but not funding commitment from SPG. Without the additional backstop, GGO would not have been funded adequately upon emergence as in both your prior offer and the eventual BAM offer that was accepted was. In the alternative, without the backstop, GGO would have had to raise funds elsewhere at considerably less favorable terms which would have had a material negative effect on the price performance of shares to date.

Because of that it is my opinion that simply comparing “mall co. to mall co.” is not a sufficient analogy as the results for GGO under the BAM recap. are far superior as to what they would have been under your “last and final” offer of 5/6.

His reply was simple:

It was the same. The backstop was there and told to the board.

Two and a half hours later I get this:

Pretty plain English that we would match Brookfield recap and including spinoff of ggo. Mr Sullivan I ought to know.

So I replied:

Mr. Simon,

In the 4/14 letter it is plain, there is no dispute (never was), it is there.

In your “final offer” all that language is dropped and simply replaced with “distribution to GGP shareholders shares of General Growth Opportunities (GGO), which you have valued at $5.00 per share.” No mention of any backstop or any rights offering. That language was dropped. If I am wrong I will be glad to correct (I have done it before, I’m not perfect). I cannot find a documented version of the final offer confirming the backstop of a rights offering (as in 4/14 letter). The two offers were different in both amounts and terms

Simply forward it to me and I will correct. I am basing what I write off what I have of your offers.

His final reply:

I can assure as it is stated in letter we were matching all aspects of the Brookfield ggo spin.

So, what to do?

The exchange brings up a myriad of questions:

1- Were the two offers Simon made for GGP the same? In writing they clearly are not nowhere in the 5/6 letter is it “clearly stated’ as Simon claims it is. Personally if it was “clearly stated” and I had someone telling me it wasn’t, I’d be happy to quote the text to prove my point, Mr. Simon did none of that in our email exchange. In order for the GGP board to assume the backstop and other terms were there they would have had to have made a host of assumptions that the “final offer” did not clearly spell out as the first offer did. Would any Board make those assumptions?

2- Did David Simon “tell” the Board of GGP the backstop was there as his email insinuates? I have spoken to people familiar with the discussions and they say they are not aware of any verbal assurances. Further they say unless such assurance were put into writing the Board of GGP would not have even considered them as they would be meaningless. So, shame on Simon if they verbally told them but neglected/refused/forgot to put it into writing.

3- Did David Simon simply assume the treatment of GGO was the same and that the GGP Board would make the same assumption so he did not include details of it in the final letter? If so, did he miss out of the largest REIT acquisition in history because their “final offer” term sheet was incomplete and that is what the GGP Board made their decision on?

4- Why wouldn’t Simon, if they were going to backstop and treat GGO “on the same terms as Brookfield” in their final offer say so? Why was that language included in the April offer but dropped from the May offer? Why? Were they making assumptions, just sloppy or playing games?

This is a hugely important point because David Simon (and the WSJ) are the only people I have spoken to who feel the offers “were identical” in regards to the treatment of HHC. I made more than a few calls in the week since my conversation with Mr. Simon and cannot find anyone who is familiar with the matter who thinks they were the same. If we assume he honestly thinks they were, then Simon made a HUGE mistake by not clearly spelling that out in their “final offer” because other people who were in the negotiations did not think they were the same, not even close and their decision making process was based on such.

Now, I’m sorry but just because David Simon (or any other CEO) says “they were the same” isn’t good enough for me. It is apparently good enough for the WSJ (it shouldn’t be) but I have no ulterior motive for taking what is told to me as gospel. I do not need access to SPG executives or invites to their events to do my job. As a matter of fact, I am pretty sure after this I’ll never speak to anyone there except the night janitor again. Nor will I be able to break news about an upcoming offer by Simon for a mall co. citing “sources familiar with the matter” translation: people at Simon. I don’t care. This isn’t about meeting an editors deadline and needing a piece for the day and needing immediate access to executives and not wanting to piss them off. This is about wanting to know every single detail of an investment I made (and continue to hold) and being 100% right about my reasoning of it whether it pisses people off or not.

So, yes, I need to see it in writing and it just isn’t there in the final offer…..it just isn’t. If there was a follow up letter sent to GGP that detailed the offer that was not public at the time, produce it, if there is a court filing I missed, alert me to it (to date despite several requests for such items, none has been produced). The fact I do not have anything leads me to believe it does not exist and one of my above scenarios is what happened.

I think Simon honestly somehow thinks the offers were the same……I also think he (or his advisors) made a mistake…

Why does it all matter? Who cares if BFP spun HHC at $5 and SPG spun it “as you have valued at $5”. What is the difference? It is huge….

BFP’s offer included an IPO at the GGP level. The excess proceeds from that IPO then went to cover certain liabilities of HHC. This aspect of the BFP proposal is what gave them the $5 valuation. Without this feature, a feature that the Simon proposal lacked, the valuation of HHC was not the same, not even close. Now, Simon was cute in his phrasing “which you value at $5”. That $5 valuation, without the IPO and liability sheltering BFP was doing is meaningless as the liabilities BFP sheltered were substantial. Because Simon did not propose the IPO or sheltering, his $5 valuation of HHC lacked merit.

The Board of GGP saw this and thus is why the HHC portion of Simon’s argument lack credibility. Now, David Simon can say all day “it was the same” but without any documentation regarding the GGP IPO/HHC liability sheltering, they simply aren’t.

Again, I am not saying they were necessarily trying to “pull one over” on the GGP Board. I simply think Simon and their advisors made a mistake……a huge one in not fully understanding how BFP came to the $5 valuation and what went into it.

The backstop/funding/liabilities.

From the “Cornerstone Agreement”

“On or prior to the Effective Date, the Company shall incorporate GGO with issued and outstanding capital stock consisting of at least the GGO Common Share Amount of shares of common stock (the “GGO Common Stock”), designate an employee of the Company familiar with the Identified Assets and reasonably acceptable to each Purchaser to serve as a representative of GGO (the “GGO Representative”) and shall contribute to GGO (directly or indirectly) the assets (and/or equity interests related thereto) set forth in Exhibit E hereto and have GGO assume directly or indirectly the associated liabilities (the “Identified Assets”); provided, however, that to the extent the Company is prohibited by Law from contributing one or more of the Identified Assets to GGO or the contribution thereof would breach or give rise to a default under any Contract, agreement or instrument that would, in the good faith judgment of the Company in consultation with the GGO Representative, impair in any material respect the value of the relevant Identified Asset or give rise to additional liability (other than liability that would not, in the aggregate, be material) on the part of GGO or the Company or a Subsidiary of the Company, the Company shall (i) to the extent not prohibited by Law or would not give rise to such a default, take such action or cause to be taken such other actions in order to place GGO, insofar as reasonably possible, in the same economic position as if such Identified Asset had been transferred as contemplated hereby and so that, insofar as reasonably possible, substantially all the benefits and burdens (including all obligations thereunder but excluding any obligations that arise out of the transfer of the Identified Asset to the extent included in Permitted Claims) relating to such Identified Asset, including possession, use, risk of loss, potential for gain and control of such Identified Asset, are to inure from and after the Closing to GGO (provided that as soon as a consent for the contribution of an Identified Asset is obtained or the contractual impediment is removed or no longer applies, the applicable Identified Asset shall be promptly contributed to GGO), or (ii) to the extent the actions contemplated by clause (i) are not possible without resulting in a material and adverse effect on the Company and its Subsidiaries (as reasonably determined by the Company in consultation with the GGO Representative), contribute other assets, with the consent of each Purchaser (which such Purchaser shall not unreasonably withhold, condition or delay), having an economically equivalent value and related financial impact on the Company (in each case, as reasonably agreed by each Purchaser and the Company in consultation with the GGO Representative) to the Identified Asset not so contributed.”

1- Portions of the GGP IPO went to settling liabilities at HHC
2- The Howard Hughes claims were settled prior to HHC being spun off from GGP
3- Master Planned Communities tax liability

1 & 2- In essence this treatment, spinning the assets of HHC while settling the liabilities of it (at the time the Hughes Heirs liabilities were not adjudicated by the court, the end amount was unknown) allowed HHC to emerge a very healthy entity. BFP agreed to indemnify HHC shareholders from those claims. The Hughes claim was settled in Sept. 2010 for $220M (estimates had the claims near $500M, Mr. Hudson did a fine job on this article BTW). That $220M would have come out of HHC shareholders pockets under the SPG plan rather than being paid by GGP as it was. The initial SPG deal would have spun BOTH the assets and liabilities of HHC. If the Hughes Heirs decided to take that $220M in stock, at emergence they would have owned 15%-20% of HHC (or up to 50% if they got the whole $500M) OR had they wanted cash, HHC would have been forced to do a secondary offering severely diluting current shareholders. Either way the results we have seen to date (~100% gain) would not have happened and the very real possibility of us dumping HHC post emergence would have existed as it value proposition would have not existed.

3- The MPC segment had a potential $300M tax liability when the plan was announced. Again, under the final SPG plan this liability would have been transferred to HHC when it was spun.

That was rectified under the GGP plan:

(b) MPC Taxes. Notwithstanding any provision of any of the Investment Agreements or any provision of this Agreement or any of the other Transaction Documents to the contrary, GGP shall be liable for 93.75% of any MPC Taxes payable in cash by Spinco or any of its Subsidiaries; provided, however, that, except as provided herein with respect to interest or penalties, GGP’s liability pursuant to this Section 2.01(b) shall be capped at the lesser of (i) $303,750,000 and (ii) the then effective Excess Surplus Amount (if any) (the applicable amount described in clause (i) or clause (ii) is referred to herein as the “Indemnity Cap”). In the event that any Suspended Deductions are utilized by Spinco or any of its Subsidiaries to offset taxable income or gain realized by Spinco or any of its Subsidiaries other than taxable income attributable to sales of MPC Assets sold prior to March 31, 2010, GGP’s current and future liability, if any, pursuant to this Section 2.01(b) shall be reduced by an amount equal to 93.75% of the incremental Taxes that would have been payable in cash by Spinco or any of its Subsidiaries had such Suspended Deductions not been so utilized. In the event that any Tax Attributes other than Suspended Deductions are utilized by Spinco or any of its Subsidiaries to offset and reduce taxable income or gain generated with respect to sales of MPC Assets sold prior to March 31, 2010, GGP shall be liable for 93.75% of any Income Taxes payable in cash by Spinco or any of its Subsidiaries that would not have been so payable had such Tax Attributes not been so utilized. In addition, notwithstanding any provision of the Investment Agreements or any provision of this Agreement or any of the other Transaction Documents to the contrary, GGP shall also be liable for one hundred percent (100%) of any interest or penalties attributable to any MPC Taxes which interest or penalties accrue with respect to periods ending on or before the date that Spinco assumes control of all Tax Proceedings relating to MPC Taxes pursuant to Section 6.03 (it being understood and agreed by the parties hereto that, for purposes of this Agreement, all penalties are deemed to accrue as of the date that the applicable penalty has been asserted or claimed by the IRS) and GGP’s liability for such interest or penalties shall not be limited by or subject to the Indemnity Cap. Spinco shall use commercially reasonable efforts to utilize the Suspended Deductions as expeditiously as possible and will not take any action, the principal purpose of which is, to cause GGP’s aggregate liability pursuant to this Section 2.01(b) to be materially greater than it would have been had such action not been taken.

In order to place Spinco and GGP in the same economic position as they would have been had certain post-Effective Date determinations been made as of the Effective Date, the Indemnity Cap shall be re-calculated and adjusted to reflect any such determination using the Adjusted CDND as provided in the Investment Agreements. Additionally, to the extent any promissory note was issued by Spinco in favor of GGP pursuant to Section 2.01(a)(ii), then, in order to place Spinco and GGP in the same economic position as they would have been had the recalculated Indemnity Cap been used for purposes of calculating such note, (i) the principal amount of such note will be reduced based on the new calculation using the Adjusted CDND, and (ii) to the extent applicable, any interest payments made by Spinco to GGP on such note prior to such re-calculation shall be refunded in respect of such reductions and accrued but unpaid interest in respect of such reductions shall be eliminated. Consistent with the foregoing, this Section 2.01(b) shall be retroactively applied using the recalculated Indemnity Cap and any resulting amounts payable thereunder shall be promptly paid by GGP.

So, we had a potential $500M liability of the Hughes Heirs and a $300M tax liability that was covered under the BFP plan that was not addressed in the Simon plan. $800M in liabilities for a company that emerged with a $1.35B market cap is more than a little substantial.

For that reason one could argue when David Simon compares “mall co. to mall co.” he needs to give HHC near zero value under his plan and its current value under the BFP plan. I fail to see how if HHC was saddled with the extra liabilities upon emergence there would be any value left there at all. That is a $7 a share difference for those keeping score at home.

From Simons 5/6 letter (click to open letter):

Emphasis Mine:

SPG is prepared to acquire GGP for $20.00 per share, consisting of $5.00 in cash and $10.00 in SPG shares at their current value and the distribution to GGP shareholders shares of General Growth Opportunities (GGO) which you have valued at $5.00 per share. The acquisilion would also include the same cash recovery for unsecured creditors as in our recapitalization proposal and provide substantially more value for equityholders.

This again, makes no mention of any of the above…