Ackman May Make $170 Million on ‘Grand Slam’ General Growth Bet. 20 bagger

Feb. 18 (Bloomberg) -- Simon Property Group Inc.’s offer of more than $10 billion to buy General Growth Properties Inc. out of bankruptcy would mean a payday of at least $170 million for investor William Ackman, almost 20 times the price of his stake.

Ackman, who runs New York-based Pershing Square Capital Management LP, bought General Growth shares in November 2008, five months before the bankruptcy filing. He paid $9.3 million for 20.1 million shares, an average of 46 cents each, according to a regulatory filing at the time of his purchase.

“He made an investment where the reward was very large, but the downside risk was very large as well,” said Jim Sullivan, an analyst with real estate research firm Green Street Advisors in Newport Beach, California. “His vision has played out as he expected and as he hoped. He took a big swing and he hit a grand-slam homerun.”

Ackman’s investment was risky because stock investors typically are wiped out in a bankruptcy. The 43-year-old hedge- fund manager bet that General Growth, which has more than 200 shopping malls in 43 states, was a healthy company that was simply short of cash to cover debt payments. The stock, he reckoned, would eventually rise.

“Most of the time, insolvent companies go bankrupt,” Ackman said in a March 2009 interview with Bloomberg Television, explaining his investment. “It’s rare for a solvent company to go bankrupt. This is a solvent company with a liquidity problem.”

Ackman declined this week to comment on his General Growth investment.

Higher Bid

The $170 million profit is based on Simon’s offer of $9 a share. The stock yesterday rose 90 cents, or 7.5 percent, to $12.92 in over-the-counter trading, its third straight gain, suggesting that investors believe a higher bid might come in, making Ackman’s stake even more valuable.

The profit estimate doesn’t include swaps that Pershing Square also owns and that expire between Dec. 10, 2010, and Feb. 16, 2011. It also doesn’t include a $15 million fee that General Growth paid to Pershing Square last year for its commitment to provide a debtor-in-possession loan to the mall operator, according to a June 2009 regulatory filing by General Growth.

Ackman issued a 54-page presentation in December that put a value on General Growth’s shares two and a half to almost five times the amount Simon offered.

“Using comparable public company valuations, Pershing Square believes GGP is worth between $24 and $43 per share,” Ackman’s hedge fund said in the presentation.

General Growth, the biggest U.S. mall owner after Indianapolis-based Simon, filed the largest real-estate bankruptcy in U.S. history in April after amassing $27 billion in debt making acquisitions.

$10 Billion Offer

Simon Property Chief Executive Officer David Simon, who said at the time of the Chapter 11 bankruptcy filing that he had tried to buy some of General Growth’s properties, this week offered to purchase the company for more than $10 billion. General Growth shareholders would get about $9 a share, including $6 in cash, and unsecured creditors would be repaid in full for about $7 billion.

General Growth said Simon’s offer is too low and it will invite others to make bids as it considers options for emerging from bankruptcy. General Growth plans, by the beginning of next month, to provide information on the company, including financial projections and shopping-mall data, to those interested in making bids.

Exchange of Letters

“We believe the information we would provide to you as part of this process will enable you to better understand the company, get to a higher valuation, and provide a fully documented offer,” General Growth Chief Executive Officer Adam Metz said in a Feb. 16 letter to David Simon.

In a letter to Metz sent yesterday, David Simon said the plan to invite other bids is risky for General Growth investors and that only Simon’s offer “provides a full cash recovery for unsecured creditors.” Simon Property is able to complete its due diligence in 30 days, and the offer “is not open-ended,” David Simon wrote.

Ackman joined General Growth’s board in June 2009. A month earlier, Ackman was outbid by a group led by another hedge fund, San Francisco-based Farallon Capital Management LLC, to provide financing to the company while it was in bankruptcy. The loan offered by Farallon didn’t include any warrants, while Pershing Square’s plan would have given it warrants to buy 4.9 percent of General Growth’s new equity when it emerges from bankruptcy.

Breaking His Way

For Ackman’s bet to be successful, he needed the availability of credit to return, shopping-mall values to stabilize and U.S. Bankruptcy Judge Allan Gropper to give General Growth leeway in developing a plan for reworking its debt -- all of which happened, Green Street’s Sullivan said.

“He needed for a lot of things to go his way for his vision to work out,” said Sullivan, whose firm provides research to Pershing Square.

Ackman’s Pershing Square International Ltd. fund fell 5.5 percent in January. It has posted an average annual return of about 19 percent since it started in December 2004. That compares with a 1.6 percent annual loss for the Standard & Poor’s 500 Index in the same period.

http://www.bloomberg.com/apps/news?pid=20601108&sid=ayJVCccKzc_8

 

How large is this gain in relation to the size of his fund?

 

He risked 1% of his 1.6 billion fund and scored about 10%.

Not too shabby. Money begets money.