Major US mall owner rallies on $14.8 billion bid, but some say offer should be sweeter

Key Points
  • Brookfield has offered to pay $23 per share for the remaining 66 percent of GGP.
  • GGP's portfolio consists mainly of "Class A" malls.
  • Like its REIT rivals, GGP has struggled to combat retail bankruptcies, store closures and a shift in spending to online platforms.
Shoppers walk outside GGP.'s Park Meadows mall, a 1.6 million-square-foot super regional shopping center in Lone Tree, Colo.
Matthew Staver | Bloomberg | Getty Images

Escalating retail headwinds aren't only impacting retailers these days — just take a look at their landlords.

General Growth Properties, one of the largest publicly traded U.S. mall owners, received a nearly $15 billion bid on Saturday from Brookfield Property Partners to acquire the shares it currently doesn't own in the real estate investment trust. The news comes after reports that Brookfield had held "preliminary discussions" with GGP about taking the company private.

Chicago-based GGP is often considered top of its peer group, with a real estate portfolio consisting mainly of "Class A" malls, or those that draw the most sales per square foot. To be sure, like its REIT rivals, GGP has still struggled with retail bankruptcies, store closures and a shift in spending to online platforms.

"We believe GGP is negotiating a privatization transaction from a position of weakness," Wells Fargo analyst Jeff Donnelly wrote in a note to clients.

Brookfield has offered to pay $23 per share for the remaining 66 percent of GGP — split between cash and equity. The Wall Street Journal first reported on the proposal Sunday evening.

"Brookfield's access to large-scale capital and deep operating expertise across multiple real estate sectors combined with GGP's high-quality retail asset base will allow us to maximize the value of these irreplaceable assets," Brookfield CEO Brian Kingston said in a statement.

GGP said it formed a special committee of independent directors to review the bid, bringing on Goldman Sachs as a financial advisor.

GGP shares surged 6.7 percent Monday to $23.69 — above the offer price, implying the pot could get even sweeter. According to analysts, a $14.8 billion price tag likely won't be enough for GGP.

"The $23 price should set a floor for GGP shares," Boenning & Scattergood analyst Floris van Dijkum said. "We believe this initial offer is too low while [Brookfield] has a history of raising its offer for takeover candidates."

Dijkum said he's expects an offer closer to $30 per share.

"While the offer is encouraging, cementing BPY's rumored interest and the recent M&A euphoria, it falls short of GGP private market value estimates and investor expectations," Mizuho analyst Haendel St. Juste said. "This is just 'round one' of a fluid situation."

Brookfield's 34 percent stake in GGP has a market value of roughly $21 billion.

GGP shares were down more than 25 percent for the year before surging last week on buyout chatter. Now, Wall Street is rallying behind a potential take private, and short sellers are seen fleeing.

Brookfield took its first stake in GGP as part of an agreement to bring the REIT out of bankruptcy in 2010. It acquired more GGP warrants in early 2013, filings show, and agreed to maintain its stake in the company below a 45 percent threshold through last January.

A year earlier, Brookfield reportedly was considering acquiring the REIT, which at the time had a market value of $24 billion. The two were also in talks prior to GGP seeking bankruptcy protection in 2009, as it prepared to restructure its $27 billion debt load.

This year, GGP has focused efforts around renovating locations and filling vacated spaces within its malls. The REIT has reduced its exposure to apparel tenants, for example, and added more food options.

"One of the key tenets of our business plan is capitalizing on the embedded opportunity with our portfolio to redevelop anchor boxes," CEO Sandeep Mathrani said on a recent conference call with analysts and investors.

In October alone, GGP acquired two Sears locations — in Pennsylvania and Louisiana. To date, GGP has invested more than $2 billion in redeveloping 115 of its properties, reaping "very attractive returns," Mathrani said.

A tie-up with Brookfield could give GGP the opportunity to pursue a more mixed-use strategy, incorporating apartments and office buildings into its properties, something Mathrani has expressed interest in doing.

Brookfield has a much more diversified real estate portfolio that includes office properties, retail boxes, multifamily housing units, student housing and self-storage centers. The proposed transaction with GGP would allot Brookfield ownership interest in roughly $100 billion of real estate assets globally.

As retailers face more challenges from online competitors like Amazon, their landlords are increasingly of interest. Other retail REITs are being targeted by activist investors who demand change at a more rapid clip.

Just last week, Dan Loeb's Third Point hedge fund revealed it had built a position in mall owner Macerich. Loeb could push for a potential sale of the company over time, according to reports.

One of the biggest activists in the real estate industry is Jonathan Litt, a former managing director at Citigroup. He founded the hedge fund Land and Buildings in 2008 and has recently pressured Taubman Centers to explore strategic options.

Taubman's portfolio consists mainly of U.S. shopping centers, but the REIT also has a small presence in China and South Korea.

In a separate attack, Litt is urging Hudson's Bay — the parent company to Lord & Taylor and Saks Fifth Avenue — to consider being taken private by management or consider other uses for its real estate.

Mall owners including GGP, Taubman, Macerich, Simon Property Group, CBL Properties, Washington Prime Group, Seritage, and Pennsylvania REIT have seen their stocks fall in 2017, some by more than 40 percent.