Bill Ackman Goes on the Offensive

by Will Ashworth | August 30, 2012 8:45 am

Bill Ackman has been in the news a lot lately.

He has been busy defending CEO Ron Johnson’s performance at J.C. Penney (NYSE:JCP[1]), and he’s also gotten himself in the news for his growing stake in Procter & Gamble (NYSE:PG[2]).

But most recently, Ackman has chosen to pick a fight with Brookfield Asset Management (NYSE:BAM[3]) over its undue influence on General Growth Properties (NYSE:GGP[4]) — the mall-owner real estate investment trust that both have a stake in.

Ackman wants to sell his stake 11% for a premium and feels Brookfield is getting in the way of that. Here’s what might come from his activist grandstanding:

The Problem

In October 2011, Bill Ackman met with David Simon, CEO of Simon Property Group (NYSE:SPG[5]), to discuss Simon buying General Growth Properties. The meeting was fruitful, and the two agreed to a transaction that would see Simon offer 0.1765 of its own shares in exchange for each GGP share putting a $21 value on the stock.

However, Simon was adamant that his company would spend no time on putting the deal together until Brookfield and Blackstone Group (NYSE:BX[6]) were onside. Blackstone quickly agreed, while Brookfield said it wanted to buy GGP and could offer similar or better terms to Simon.

According to Ackman, Brookfield has spent the past 10 months trying to put the financing together, with no success. On Aug. 24, Brookfield issued a press release indicating it is no longer interested in acquiring GGP, but wants to remain a long-term investor.

If Simon pursued the same deal today, it would value GGP stock at $28 a share for a 40% premium. Although Ackman already has made something like 77 times his original investment, it’s easy to see why he’s miffed with Brookfield. At the very least, you can expect GGP to form a special committee to pursue a transaction that would provide long-term value to shareholders.

The Solutions

The fate of GGP is clearly in the hands of Brookfield. Approximately half its 42% stake in the company is controlled by its consortium partners, who likely have a shorter investment horizon. BAM is a third-party investment manager and must balance its own goals with those of its clients. With GGP doing well, it’s tempting to hang on to its 42% passive investment, receiving management fees for doing very little.

However, it’s unlikely those partners would be OK with this given Ackman has presented a profitable alternative.

Despite holding a significant stake, which Ackman characterizes as “de facto” control, Brookfield is going to have to fish or cut bait. With more than $150 billion in assets under management, I find it hard to believe that Brookfield can’t find the financing necessary to consummate a deal — it obviously is conflicted about how to best leverage its stake in GGP.

Another possibility is Brookfield buying Ackman’s shares, which would give it majority control of GGP. That could be the reason behind all of Ackman’s saber rattling. Having control of GGP makes a lot more sense for a company like Brookfield than owning 16% of a combined Simon/GGP. Although it would be the largest shareholder by a considerable amount under a combination, Brookfield wouldn’t exercise the kind of control it likes to have. Ackman realizes this and is simply creating a second bidder for his shares.

He’s not a billionaire for nothing.

The final possibility is remote, but it’s General Growth making a play for its much bigger rival. Any deal would ratchet up its debt, not to mention dilute Brookfield’s position. However, a back-of-the-napkin calculation suggests it would end up owning more of the combined companies this way than the other way around. At the end of the day, it’s probably too big a deal to successfully bring to fruition.

If I were a betting man, I’d put my money on Brookfield buying Ackman’s stake at a nice premium. Time will tell if I’m right.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

  1. JCP:
  2. PG:
  3. BAM:
  4. GGP:
  5. SPG:
  6. BX:

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