Is it the real estate merger of the decade, or just bond traders hyping a deal that isn't real?
The question is quietly lurking around the Rouse Co. of Columbia, as reports originating in Canada say Rouse is investigating a possible deal to bail out one of that nation's biggest developers. The problem is that U.S. analysts who follow Rouse say they haven't heard the rumors and doubt it will happen.
Rouse is indeed probing the finances of troubled real estate giant Cadillac Fairview Inc., which has been staggering since the recession wrecked a $2.7 billion 1987 leveraged buyout led by the Chicago-based JMB Realty Trust.
Rouse confirms that it has signed a confidentiality deal with Cadillac Fairview. A spokesman for Cadillac declined to say if there is any agreement, but said his company has sought confidentiality deals from several possible bidders to whom it has given access to its financial secrets.
"The purpose of it is to obtain confidential information and do preliminary work to allow them to be in a position to offer to make an investment," Cadillac Fairview spokesman Patrick Howe said. There is more than one situation like that."
"I'm not supposed to say nothing about nothing," Rouse investor relations director David L. Tripp said. "We look at lots of deals. Sometimes they happen, sometimes they don't and we don't feel it's appropriate to comment until there's something definitive to say."
Dramatic effect
If the deal actually happens, the effect on Rouse would be dramatic. It would give Rouse control over 70 U.S. and Canadian properties, mostly high-end shopping malls and mixed-use projects, including some of the nation's most glamorous business and retail addresses, to a Rouse portfolio that includes 78 retail properties and more than 50 office projects.
The engine behind the rumors is a late-July letter from a vice president at Goldman Sachs & Co., the New York investment bank, to outside financiers who head Cadillac Fairview's two major creditors' committees.
In the letter, which was obtained by The Sun, Goldman vice president Ralph Rosenberg says Rouse has signed a confidentiality agreement with Cadillac Fairview in exchange for the right to examine its financial records. Such a review -- called a "due diligence" investigation -- gives investors much more information than companies disclose in quarterly earnings reports.
"We would recommend the Rouse Co. as new management," the letter says. "We believe Rouse would be in a position to make a cash investment and to potentially offer Rouse common stock as consideration, if creditors prefer, for a stake in [Cadillac Fairview]."
Goldman Sachs recently paid a reported $158 million for 25 percent of Cadillac Fairview's bank debt.
Mr. Rosenberg wrote that Rouse won't talk to Goldman Sachs because of the confidentiality agreement, but urged the creditors to force Cadillac Fairview to allow them to talk to the Maryland company.
He told creditors that putting Rouse in charge of a restructured Cadillac Fairview would be smart because, they would get more of their money back if the company keeps operating instead of auctioning off its assets. The letter started enough bond-market speculation to lead the Globe and Mail in Toronto to report that "New York market players" believe Goldman is "running interference" for Rouse in a plan to "make a bargain-basement bid" for Cadillac Fairview.
However, that would flatly contradict Mr. Rosenberg's written assertion that Goldman and Rouse had not coordinated their actions.
But one of the people the letter was addressed to said nothing has come of Goldman's plan so far.
No deal yet
"That's what Goldman is proposing," said Geoffrey Godard, a Toronto banker who is coordinator of Cadillac Fairview's bank lenders' steering committee. "There is no deal on the table, with Goldman or without Goldman."
Mr. Rosenberg said he would also be willing to talk with other potential bidders, who have been reported to include Simon Property Group Inc. of Indianapolis, Taubman Centers Inc. of suburban Detroit, and Chicago developer Sam Zell, who controlled the One Charles Center tower in Baltimore until last year.
The other recipient of the letter, Trust Company of the West managing director Bruce Karsh, declined to comment. "You are getting into an area that's way too sensitive," he said.
A Goldman spokesman declined comment.
The problem with the scenario is that analysts who follow Rouse more closely than the bond traders are skeptical that the deal Mr. Rosenberg proposed could -- or would -- happen.
There would be one obvious reason to move ahead with the deal, said analyst Catherine C. Creswell, who follows Rouse for Alex. Brown Inc. of Baltimore.
Big returns
She said real estate investment trusts have made big returns since the recession by buying properties at prices that were available only because the sellers had big financial problems and pressing cash needs.
"The best way to make money is from distressed sellers," she said. "If it's the right type of portfolio certainly it would make sense to look at it."
On first glance, Cadillac Fairview meets the description. In May, the company's main subsidiary wrote down the value of its assets by almost half and reported a loss for the year of $2.71 billion (Canadian), one of the biggest losses in Canadian corporate history.
However, Salomon Inc. analyst Jonathan Litt said Cadillac Fairview won't sell for a distress-sale price. He said major mall developers like Simon Property Group Inc. of Indianapolis and Taubman Centers Inc. of suburban Detroit are looking at Cadillac Fairview along with Rouse, and the high interest in Cadillac Fairview rules out a rock-bottom price.
"There are enough people looking at it that no one is going to get a good deal," he said. "It will be an average deal."
But Rouse would have a hard time coming up with major investment money, said Mr. Litt, who wrote a recent report showing Rouse has more debt for its size than any other shopping mall developer Salomon follows. "They already have a high debt ratio," he said. "I don't know where they would get the cash."
Another analyst, who asked not to be named, said the deal would be a higher risk than Rouse normally takes. Rouse stopped developing new malls in 1987, thus skipping the worst of the real estate speculative frenzy. And the two malls Rouse announced plans to build earlier this year are extremely low-risk ventures, he said.
In addition, there are explanations for both Rouse's action and Goldman's letter that would make them sensible moves even if Rouse has no real plan to take over Cadillac Fairview.
Ms. Creswell said Rouse may be investigating Cadillac Fairview simply to learn more about competitive conditions in the shopping center industry, hoping to gather information it can use to make its existing centers more competitive.
Goldman could benefit
Mr. Litt said Goldman has a lot of reasons to push for the deal even if Rouse isn't very interested. A restructuring could vastly increase the value of its Cadillac Fairview debt, and could also help Goldman land lucrative investment-banking business.
"Goldman Sachs believes it can provide a group of investors who, along with Goldman Sachs, would be willing to underwrite a rights offering" for a newly reorganized Cadillac Fairview, Mr. Rosenberg's letter says.
"They're running around and trying to drum up business," Mr. Litt said of Goldman.
Whatever finally happens, Mr. Howe said, it's likely to happen in the fall.
"There is no immediate financial crisis," even though the company's one public subsidiary has a negative net worth, he said. "But we do feel the need over the long term to get the debt and equity of the company to a more appropriate mix."
Mr. Tripp took in all the speculation with a certain amusement.
"Well, everybody's got opinions don't they?" he said.
"We've always said we'd like to make acquisitions, but certainly there won't be anything specific [from Rouse] on any of them until there's something to say."