It’s August, things are slow, and I have a suspicion that Carl Icahn let his lawyers go on vacation and is just writing his two-sentence letters to CVR Energy himself. Bill Ackman, not so much:
To the Board of Directors of General Growth Properties:
… [eight pages] …
I look forward to speaking further with the Board about the above.
He even cc’s a lawyer.*
The saga here is long and winding; the letter actually explains it well or you could read this Reuters article but in sort-of brief:
- Pershing Square is the second-largest shareholder of GGP, with 7.7% of the company, or 10.2% on Ackman’s somewhat aggressive accounting**
- The largest holder is Brookfield Asset Management, with 38.2% plus warrants for 4% more.
- Pershing and Brookfield got their shares mostly in the process of helping GGP out of bankruptcy, which it was in due to some unpleasantness over some loans, but it’s doing great now thanks for asking.
- But keep in mind:
At the time that Brookfield negotiated the bankruptcy recapitalization with the GGP board under the supervision of the bankruptcy court, one of the most important considerations of the transaction and one of the most highly negotiated elements of the deal was GGP’s ensuring that the sale of stock and warrants to Brookfield did not represent a sale of control.
Not transferring control to Brookfield was critically important because GGP was selling stock and warrants to Brookfield at a price that did not reflect a control premium to GGP shareholders.
- But there’s now some risk of Brookfield getting control without paying a premium, as (1) it has been buying shares in the market, (2) GGP has been buying back shares and thus concentrating Brookfield’s ownership, and (3) anti-dilution features in Brookfield’s warrants have increased its ownership each time GGP has paid a dividend:
In summary, Brookfield has gone from owning 29.0% of the company at emergence to 42.2% today. It is only a matter of time before Brookfield de facto controls the company.
- That catches you up to about October, when Simon Property Group came to Ackman and asked to buy GGP at a big premium.
- Ackman put them in touch with GGP and Brookfield, who basically said no but offered to discuss buying the company themselves and selling some malls to Simon.
- But that may have been a trap:
In order for SPG to consider the purchase of the 68 malls and obtain the due diligence materials it required, we understand that GGP required Simon to enter into a highly restrictive confidentiality and standstill agreement that, among other limitations, prevents Simon from making offers to acquire GGP or its assets for an extended period of time.
In late April or early May, we learned from Brookfield that Simon had rejected the purchase of the 68 assets on the proposed terms because Simon objected to Brookfield’s selection of assets and believed the price was too high.
- But Simon already signed the standstill, and so without a deal they’re stuck. Or since someone has been reading Fifty Shades of Grey:
Simon, currently the most likely buyer of the company, is not being provided access to inside information, and has been effectively handcuffed and gagged from considering or proposing a transaction for which it needs no financing.
- Meanwhile Brookfield apparently talked a good game to Ackman about buying the company themselves, but didn’t do anything about it and last night responded to Ackman’s letter with a statement saying that “Brookfield is not taking any steps to acquire GGP nor is it having any discussions with third parties in that regard. Brookfield has no interest in selling its stake in GGP.”
- Though they don’t exactly deny Ackman’s claim that they’re acquiring control stealthily through buybacks and dividends and so don’t need to buy the company.
I mostly just think this will be fun to watch, but a few items for your consideration:
(1) You don’t have to believe that Brookfield had a nefarious plan to get control of GGP without paying for it to think – “this is a pretty good nefarious plan to get control of GGP without paying for it.” Getting 40% of a company and having it conduct buybacks is a pretty standard way to sneak your way into control, but the warrant adjustment here is a neat trick. The warrants were given to Pershing Square and Brookfield as part of the bankruptcy emergence, and standard market terms for warrants include an antidilution adjustment to give the warrantholder the benefit of a dividend: if shareholders get cash, warrant holders should get the same amount of benefit, and since they can’t get cash (basically for accounting reasons) they get extra shares instead. If you buy warrants in a bankrupt REIT you can expect that, if it survives, its dividend will be going up – REITs are basically required by tax law to pay significant dividends when they’re profitable, and bankrupt companies are typically not paying dividends so there’s that. And as that dividend goes up, so will your ownership. This is a neat trick because, when you get to 49.9%, a reasonable board might decide to maybe cut out the share buybacks – but a REIT board really can’t decide to cut back on the dividend. So you creep right over the line.
(2) You don’t have to believe that Simon nefariously breached its standstill agreement, or that Pershing Square are nefariously working with Simon, to think – “this is a pretty nefarious way for Simon to get around its standstill agreement.” Generally speaking a standstill prohibits a tender offer for the company, but also and even more importantly it prohibits you from publicly announcing that you want to buy the company: when you “handcuff and gag” a potential buyer, it’s important not only to keep them from launching a formal bid but also to keep them from launching the sort of public campaign to pressure the board that … well, that this letter looks like. Simon may be handcuffed and gagged, but they’re doing some decent ventriloquism by getting Pershing Square to write an eight-page letter advocating for their deal. (Unless of course Simon is no longer interested, in which case this letter is going to look pretty awkward for Pershing Square.)
Of course it would be bad for both Simon and Ackman to be working together – but the benefit of this situation is that they don’t need to be. A casual remark from Simon to Ackman – “boy, these GGP guys are really stalling us” – could be enough to get Pershing Square in motion. Even that is not necessary: once Ackman knows that Simon is negotiating a deal, he can always call up Brookfield, see if a deal is still on the table, and if he’s not satisfied with the answer he can go public. That, presumably, is part of why Simon went to Pershing Square, rather than Brookfield, with their offer: it allows them to go into the standstill negotiation with the equivalent of an “I have left a letter in a safe place with instructions to open it upon my suspicious death” threat. If you were Brookfield and the GGP board, and Simon came to you through Pershing Square, wouldn’t you ask Pershing to sign a standstill too? (Of course – would you expect them to agree?)
(3) What does this mean: “We note that in the event that a suitable transaction with Simon can be negotiated that is supported by the substantial majority of shareholders other than Brookfield, but for which it is mathematically difficult to get the required majority vote given Brookfield’s ownership, the Board can take steps to enable the required shareholder vote to be consummated”? I think it means something like “if you decide it’s in the best interests of shareholders to do a deal with Simon, and you worry that Brookfield’s 42% stake could block a vote, Pershing Square would be happy to take an extra 19% of the company off your hands (not requiring a shareholder vote) and then vote that 19% stake for a deal.”
Which I guess would work? It seems pretty aggressive for a board to put its thumb on the scales of an M&A transaction by selling a block of new shares to one set of voters. (What’s the right price? Presumably the deal price – you couldn’t sell shares to Pershing at market and have them turn around and sell them into a deal at a premium – so you’d have to issue the shares right before the vote, no?) On the other hand, Ackman is certainly not wrong that Brookfield’s interests may diverge from those of the other shareholders, so the board wouldn’t be so much overriding shareholder opinion so much as protecting public shareholders from one conflicted insider.
Still, it’s uncharacteristic for Ackman to ask a corporate board to do what it thinks is right for shareholders even over the objection of a majority of shareholders – and to manipulate the shareholder vote to get there. Relying on a board’s judgment of what’s right for shareholders, rather than shareholder-voting majority rule, seems like a bit of a stretch for an activist fund. Imagine the board doing this,*** Brookfield suing, and Pershing Square going to court to argue “of course there’s nothing wrong with a board placing a big block of shares in friendly hands in order to get its preferred outcome in a shareholder vote.” You’d sort of expect them on the other side of that argument.
Pershing Square letter to GGP board [EDGAR]
Pershing Square says General Growth should consider sale [Reuters]
* Actually a lawyer who taught my M&A class many years ago. Small world.
** Anyone else think that Bill Ackman may someday regret saying things like “We own 72,233,712 common shares of GGP, long-term warrants on 18,224,213 shares, and cash-settled swaps on 7,569,272 million shares which combined give us a 10.2% stake in the company”? What with the SEC trying to treat cash-settled swaps the same as shares for reporting purposes?
*** Don’t imagine it too hard though – Brookfield controls 1/3 of the board and appoints the chairman; the board isn’t doing anything to screw Brookfield. This is at this point PR pressure, not backroom maneuvering.