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March 10, 2010 5:53 PM

S&C Joins General Growth Fray

Posted by Brian Baxter

Sullivan & Cromwell is advising fund manager Fairholme Capital Management and hedge fund Pershing Square Capital Management on an offer to provide $3.9 billion in new capital to General Growth Properties to help the bankrupt mall operator exit Chapter 11.

Andrew Dietderich, the head of S&C's bankruptcy group, and corporate partner Alan Sinsheimer are representing both Fairholme and Pershing Square on the matter. The firm, which has represented Pershing Square in the past, began advising Fairholme earlier this week on its offer to buy nearly $2.8 billion in shares from GGP, the second largest owner and operator of shopping malls in the country.

The capital infusion could provide GGP with enough cash to exit bankruptcy, according to Reuters. Unlike a $10 billion takeover M&A bid for GGP submitted in mid-February by rival mall owner and operator Simon Property Group, the Fairholme/Pershing investment offer would enable the debtor to emerge as a standalone company. (Simon has been advised on its bid by Adam Emmerich and Benjamin Roth at Wachtell, Lipton, Rosen & Katz.)

With $1.83 billion in company debt, Fairholme is one of GGP's largest unsecured creditors. So, too, is Pershing Square, which also holds the largest equity stake in the Chicago-based REIT.

This latest equity offering follows a parallel bid of $2.6 billion by Toronto-based property and infrastructure investor Brookfield Asset Management for a 30 percent stake in GGP. Brookfield, which is being advised by Willkie Farr & Gallagher business reorganization chair Marc Abrams, is also reportedly lining up a $1.5 billion loan for the debtor.

Taken together, the $2.6 billion offer by Brookfield and the $3.9 billion proposal by Fairholme and Pershing Square amount to $6.5 billion in cash. When combined with the expected $1.5 billion debt issuance by GGP, the debtor could have enough cash on hand to pay down its roughly $7 billion debt in full, according to a statement released late Monday by the debtor.

In a letter to GGP CEO Adam Metz and COO Thomas Nolan, S&C's Dietderich emphasized that the Fairholme/Pershing Square offer is superior to Simon Property's offer. The Simon bid has already been rebuffed, but other prospective bidders are circling. (Australian shopping mall owner Westfield has reportedly signed a nondisclosure agreement with General Growth.)

Dietderich's letter states, in part: "There can be little doubt that this is a poor time to sell a newly relisted REIT. GGP has suffered from the worst recession since the Great Depression.... We are convinced that GGP's operations will improve when it emerges from bankruptcy and benefits from an improvement in the economy. We respectfully submit, as your largest stakeholders, that the long-term value of GGP is significantly greater as a stand-alone company than the proceeds generated by a sale to a third party."

In order to move forward with the investment offer, Pershing Square founder and CEO William Ackman stepped down on Monday from GGP's board of directors. Ackman came under attack in recent weeks from unsecured creditors and Simon over an alleged conflict of interest given his role as a director and as the company's largest shareholder, and as the architect of GGP's reorganization plan.

As previously reported by The Am Law Daily, a reorganization plan unveiled by GGP in late February calls for the debtor to be split in two. GGP would contain most of the current company's operating assets, while a smaller company called General Growth Opportunities would be set up to control certain real estate holdings and nonoperational shopping malls.

Reuters reports that Ackman essentially is doubling down on his investment in GGP through the agreement to invest up to $3.9 billion in the debtor through Pershing Square and Fairholme. According to Reuters, the offer throws Simon's bid into question and might possibly force the Indianapolis-based mall operator into a joint bid with Westfield. Even if Simon prevails, Reuters reports, Ackman and Pershing Square still stand to benefit given their 25 percent stake in the company.

Weil, Gotshal & Manges and Kirkland & Ellis are cocounsel to GGP in its Chapter 11 case. Weil bankruptcy chair Marcia Goldstein and partner Gary Holtzer are advising the holding company, while Kirkland restructuring partners James Sprayregen and Anup Sathy are representing GGP subsidiaries.

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