In our third article on General Growth Properties, one of the largest mall owners in the United States, Pershing Square Capital Management and Fairholme are working to increase Brookfield’s bid to purchase a stake and provide capital for the firm.  As mall attendance fell through the recession and it became difficult to pay back commercial real estate debt, it was feared that General Growth would go into bankruptcy and had to be restructured.  Recently, General Growth received a $10 billion all cash bid from Simon Properties, which it turned down because it felt the valuation was too low!

According to Mr. Taub of Bloomberg, General Growth Properties Inc.’s biggest debt and equity holders will offer to jointly invest $3.93 billion in the mall owner to help bring the company out of bankruptcy, according to a person familiar with the plan.

Fairholme Capital Management LLC, General Growth’s largest creditor, and Pershing Square Capital Management LP, the biggest shareholder, are working with Toronto-based Brookfield Asset Management Inc., said the person, who asked not to be identified because the talks are private. The proposed deal would add to Brookfield’s planned $2.63 billion investment and would pay unsecured creditors in full in cash, the person said.

The cash payment matches a provision of a competing bid by Simon Property Group Inc., which has offered to buy its biggest competitor for more than $10 billion and pay all unsecured creditors. Chicago-based General Growth rejected that bid as too low and said last month it would split itself into two companies to exit bankruptcy, with the investment from Brookfield.

“They realized their original deal was weak compared to Simon’s,” David Fick, an analyst with Stifel Nicolaus & Co. in Baltimore, said of Brookfield. “They have to show an equivalent deal.”

Brookfield’s new plan is being considered by General Growth’s board. The proposal calls for Bruce Berkowitz’s Fairholme Capital and William Ackman’s Pershing Square to buy about 380 million new General Growth shares at $10 each, with 72 percent being purchased by Fairholme and the balance by Pershing Square, said the person familiar with the plan.

Share, Debt Offerings

Those investments would combine with 250 million shares Brookfield would buy, $1.5 billion in new debt Brookfield is raising, and a $250 million rights offering for a new company, General Growth Opportunities. Brookfield will backstop $125 million of that sale, and Fairholme and Pershing Square will backstop the rest, the person said. Combined, more than $8 billion would be raised.

Berkowitz is unable to discuss the plans until he files with the U.S. Securities & Exchange Commission, said Janice Aman, a spokeswoman for Fairholme with outside firm Mount & Nadler Inc. Ackman declined to comment.

David Keating, a General Growth spokesman, had no immediate comment. Denis Couture, Brookfield’s senior vice president for corporate affairs, declined to comment. Simon Property spokesman Les Morris said he had no immediate comment.

Largest Shareholder

Fairholme would be General Growth’s largest shareholder with more than 30 percent of the company’s stock, followed by Brookfield with about 30 percent, and Pershing Square with 17 percent or 18 percent, the person said. Ackman resigned from General Growth’s board on March 5 to make the offer, according to the person.

New York-based Pershing Square currently owns a 25 percent economic interest in Chicago-based General Growth, including 7.5 percent of its shares. Fairholme owns about $1.9 billion of General Growth debt, while Brookfield has about $500 million and Pershing Square owns about $434 million, according to the person.

Brookfield’s previous plan gave General Growth equity holders $15 a share, compared with about $9 a share under Simon’s offer. That version called for General Growth to raise as much as $5.8 billion by issuing shares and new debt and through the sale of properties.

Unsecured creditors objected to General Growth’s agreement with Brookfield, saying in a March 2 bankruptcy-court filing that the plan was too risky. Indianapolis-based Simon, in a separate filing, supported the creditors.

Market Risk

“While Simon has offered to pay unsecured creditors in full in cash, the consideration to be offered to unsecured creditors under the ‘recapitalization’ is entirely subject to market risk,” David C. Bryan, Eric M. Rosof and Emil A. Kleinhaus, Simon’s attorneys, wrote in the filing. “If General Growth does not raise enough money to pay unsecured creditors, they will be stuck with the equity securities of a highly leveraged company.”

U.S. Bankruptcy Judge Allan Gropper in Manhattan last week rejected a request by General Growth to extend control of its bankruptcy through Aug. 26, giving the company until July 15.

“I do think it is in everyone’s interest that we proceed with an aggressive timetable, one that gets us out of this case as soon as possible, so there is less risk to the creditors,” Gropper said at the March 3 hearing.

General Growth filed the largest real-estate bankruptcy in U.S. history in April after amassing $27 billion in debt making acquisitions. Under its plan with Brookfield, General Growth would split into a company owning shopping malls and another that would own buildings and land with redevelopment possibilities.

The new company, to be called General Growth Opportunities, would have holdings including six master-planned communities, New York’s South Street Seaport, and land in Hawaii, Utah and Princeton, New Jersey. The plan must be approved by the bankruptcy court.

General Growth rose 7 cents to $14.08 as of 4:15 p.m. in New York Stock Exchange composite trading. The company’s shares have gained 22 percent since the beginning of the year.