Simon vs. General Growth

Today, I start by offering my condolences. It’s tax day, never a pleasant time of the year.   


Yesterday, I noted that the recent rally lacked enthusiasm. Low volume and small daily gains were the hallmarks. Did all that change yesterday after Intel (Nasdaq:INTC) posted blowout numbers?   


Maybe. Volume posted its best totals since February. And the S&P 500 made its biggest gain since March 5.   


But more importantly, we’re seeing money come out of money-market funds. iMoneyNet reports that U.S. money market mutual fund assets fell by $31.49 billion to $2.908 trillion in the week ended April 13.   


Clearly, there’s still a lot of cash sitting on the sidelines. Some would say that this money belongs to individual investors who don’t want to be burned by another market crash. And cynics would say that the recent rally has been engineered to attract this money back into the stock market.   


Unfortunately, the individual investor has a tendency to get bullish right at the top of a rally.  


Now, just because anecdotal evidence suggests that the retail investor may be getting bullish is not a definitive sign that the stock market has peaked. Still, if the advance for prices continues like yesterday, we should be on our guard.   


China’s economy surged 11.9% in the first quarter this year. And that’s despite efforts by the central bank to slow growth and head off inflation in the real estate market. 


Analysts are saying this gives China even more incentive to let its currency appreciate in value. The irony here is that China’s yuan is pegged to the U.S. dollar. The Fed could guarantee the yuan appreciates by simply raising interest rates.   


Of course, that defeats the purpose. We want our currency to be the weakest in the world.   


I’ve been following the General Growth Properties (NYSE:GGP) buyout scenario closely. It’s fascinating to a stock market geek like me.   


If you’ve been following my narrative, you know that the #2 shopping mall owner in the U.S., General Growth, is attempting to emerge from bankruptcy. #1 shopping mall owner Simon Property Group (NYSE:SGP) tried to buy GGP out for $10 billion a few months ago.   


GGP and some of its big hedge fund investors (including China’s sovereign wealth fund, the CIC) believe this offer is too low, and so they set up their own plan to inject the needed capital into GGP and emerge from bankruptcy as a stand alone company.   


Part of this plan required GGP to issue a boat-load of warrants that could be converted to stock. The purpose of the warrants is a direct response to Simon’s $10 billion bid. If Simon wants to buy GGP, it needs to do so before a bankruptcy judge approves the capital-injection plan, or there will be some massive dilution to the stock.  


Pretty savvy move to turn the heat up on Simon. And investors have been waiting to see what Simon’s next move would be. The hope was that Simon would panic and make a much sweeter offer for General Growth.   


Not so fast. Simon has some tricks up its sleeve.   


Yesterday, Simon offered to match the capital injection offered by the hedge funds, except Simon won’t ask for warrants. That makes Simon’s offer more attractive and more likely to be accepted by the bankruptcy judge.   


Neither of these players wants to be a GGP shareholder. The hedge funds want a better buyout number, and Simon wants to own the company. But Simon doesn’t want to be in a bidding war, and it also doesn’t know who else has its eye on GGP  


So this move by Simon is brilliant. For one, the company bought time for itself. And it may force the hands of any other GGP suitors who may be panicking at the thought of Simon becoming a big shareholder. Brilliant.   


Now, the General Growth buyout saga has implications for other beaten down commercial real estate companies. Because these companies own valuable assets. It’s just that their cost structure is all out of whack due to the financial crisis. Rents are down, but commercial mortgage debt is not, nor can it be refinanced in the current environment.   


That means the people with cash – hedge funds and sovereign wealth for instance – are in the cat-bird seat because they can pick up valuable assets on the cheap. Daily Profit readers shouldn’t miss the fact that the former CEO of Maguire Properties (NYSE:MPG) has offered to take a few problem buildings off Maguire’s hands.   


The increasing interest in the assets of commercial real estate companies has helped them rally recently. And that rally isn’t done. These stocks will continue higher until the buyouts actually start. And depending on buyout terms, they will likely continue to rally.   


If you haven’t seen TradeMaster Jason Cimpl’s video report of commercial real estate stocks breaking out to higher prices, you can do so HERE 

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