In fishing they call it a feeding frenzy. It usually starts when a ball of bait fish get caught in predator-made whirlpool – a tuna swirl. Instinctively, they ball up to mimic a bigger fish, hoping to stave off predators. Then it happens – one tuna strikes, then another and another until blood colors the water and the news spreads through the synaptic cloud of flesh particles and blood leaving nothing but bubbles, red water and satisfied bellies. It can also begin with a just a few sharks competing for a single disabled fish. Instead of waiting for it to lumber to the bottom, they strike early and often in the hope to get control of it while there is still freshness in its flesh. And when it is over, the benefits extend well beyond the attacking fish. Particles suspended in the viscous cloud are sustenance to the smaller fish that dart in and out for a piece or two. What they fail to collect settles to the bottom feeders who gather up the vestiges of the battle. In the end, the ocean gleams and the ecosystem is rejuvenated as each participant takes its pound, or particle, of flesh.
What works in tuna swirls, also works in the world of real estate. Swarmed by the predatory fury of Simon Property Group, Vornado Realty Trust and Brookfield Asset Management, the giant General Growth Properties (“GGP”) balled up like baitfish in US Bankruptcy court early this year. The effort is proving to be little protection as the giant fish begin to swim in and out for the biggest bite. GGP currently has an interest in over 200 regional shopping malls in 43 states with ownership in many planned community developments and commercial office buildings. The portfolio comprises some 200 million square feet of retail space and includes over 24,000 retail stores nationwide. It is, to say the least, a leviathan.
And this leviathan is making a bid to escape with its life. Backed by three investors in two separate deals – Brookfield, Fairholme Capital Management and Pershing Square Capital Management, GGP seeks to raise over $6 billion. The combined deal, with some additional debt financing by GGP, will provide needed blood flow of nearly $8 billion, which will energize GGP to eventually emerge from the cloud of bankruptcy with a fin or two intact.
But don’t think this is not a feeding frenzy. As part of the deal, GGP will issue valuable and lengthy warrants as compensation for the backing to Brookfield – said to be worth some $300 million. Fairholme and Pershing Have secured other mechanisms and protections to maximize their interest and deal value. Needless to say, the lawyers and bankers are feeding well too. Yet the deal is not done and the water still swirls. Simon Property Group, a direct GGP competitor, seeks to acquire GGP with a full, unsolicited $10 billion takeover bite. It is not happy with the latest cooperative effort. The Brookfield warrants alone would add hundreds of millions to any takeover price. GGP rejected Simon’s offer out of hand and the two giants have been snapping at each other ever since.
Add to this a secondary frenzy with Starwood Capital Group, TPG Capital and Five Mile Capital Partners who have thrown $905 million into Extended Stay Hotels Inc. as part of a recapitalization plan. Also, Apollo Management LP is expected to take control over the real estate assets of Citigroup, Inc. So the feeders are active. These aggressive actions are a sign that nourishment has flowed back into the real estate estuary and the cycle is beginning to renew. No one knows exactly how it will settle out, but all understand that a little flesh in the water is good for the ecosystem.