Simon Property Group Inc sought to pluck General Growth Properties out of bankruptcy on Tuesday, offering to pay $7 billion to creditors and nearly $3 billion to shareholders in a deal that would combine the two largest U.S. shopping mall owners.

Late Tuesday, General Growth responded, saying it was exploring all potential alternatives to emerge from bankruptcy, including a sale and raising equity from institutional investors in order to remain a free-standing company.

The proposal by Simon calls for paying off General Growth's unsecured creditors and giving its equity holders $6 a share, or roughly $1.9 billion, plus an additional $3 from a spinoff of the master-planned communities General Growth owns.

By making its offer public, Simon appears to be trying to pressure General Growth to negotiate. The move could prompt others to make a play for second-largest U.S. mall owner.

The game has begun, said Jim Sullivan, Green Street Advisors Inc managing director.

With the backing of General Growth's committee of unsecured creditors, Simon's offer has an early advantage. But any deal must win approval of the bankruptcy court, and Simon may face opposition from General Growth's board and others.

One major investor who could affect the outcome is fund manager William Ackman of Pershing Square Capital, who has argued that General Growth's stock is worth $24 to $43 a share. Ackman, who controls 25 percent of the General Growth shares, is also a significant bond holder and is on the board. He did not respond to phone calls seeking comment.

General Growth stock jumped 28 percent to $12.02 on Tuesday.

Other investors, like Brookfield Asset Management , which has been buying up General Growth unsecured debt, may also be interested in making a run at General Growth. Australia's Westfield Group , the world's largest mall operator by market value, said in Sydney that it was not yet ready to make major new investments in the United States.

Simon has taken their first shot at trying to win General Growth, Sullivan of Green Street Advisors said. This sets up a very interesting series of decision and events going forward involving Simon, involving General Growth, involving Brookfield and involving anyone else out there who wants to own this portfolio.

Brookfield spokesman Denis Couture declined to comment.

Under Simon's offer, the unsecured creditors -- General Growth bondholders, the lenders under its credit facilities and the holders of its trust preferred securities, its exchangeable senior notes and its bonds from the acquisition of Rouse Cos -- would all receive full recovery plus accrued interest and dividends.

Full cash payment to all unsecured creditors and the substantial recovery for equity bond holders that Simon has proposed would be a great result, Michael Stamer, counsel for the unsecured creditors committee, said in a statement.

Simon said it is also prepared to pay stock to holders of equity or bonds for either all or part of their payments.

A successful deal by Simon would give it 40 percent of the U.S. regional mall market, Stifel Nicolaus has estimated.

Chicago-based General Growth's properties include South Street Seaport in New York, Fashion Show in Las Vegas and the cash cow Ala Moana Center in Honolulu.

Indianapolis-based Simon owns or has an interest in more than 300 properties in North America, Europe and Asia. These include such well-trafficked malls as Roosevelt Field on New York's Long Island and Sawgrass Mills Circle near Fort Lauderdale, Florida.

The Simon offer shows that investor appetites are growing for properties that generate cash.

There's money ready and willing to act and to jump in and buy assets, now that they're starting to believe or sensing that it may not get any cheaper, said Robert Gadsden, a portfolio manager with Alpine Woods Capital Investors, which has shares in Simon and General Growth.

Simon says it plans to finance the deal with cash on hand, existing credit facilities and by bringing in institutional investors for joint ventures on some of the properties. At the end of the year, Simon had $4.3 billion of cash on hand and $3.1 billion available under its corporate credit facility.

For the past several months, Simon has tried to engage in serious talks with General Growth, a person familiar with the discussions said.

In its letter Tuesday to Simon, General Growth said it plans to send out detailed information about the company and its properties to interested parties by the beginning of March.

General Growth filed for Chapter 11 protection in April in the biggest real estate bankruptcy in U.S. history. The company was weighed down by debt from its 2004 acquisition of Rouse Cos, which brought it top-quality malls as well as Rouse's master-planned community business.

Rouse's 5.375 percent notes due in 2013 rose to 105.25 cents on the dollar on Tuesday, yielding 3.9 percent, versus 101 cents on Thursday, the last, most significant trade, when those bonds yielded 5 percent, MarketAxess data showed.

Simon's bonds, which are investment grade, fell slightly as the yield relative to Treasuries were up 7 percent. General Growth's bonds were not active.

Lazard Ltd , JPMorgan and Morgan Stanley are financial advisers to Simon. Wachtell, Lipton, Rosen & Katz is legal adviser.

Simon shares closed 3.9 percent higher at $74.82 on the New York Stock Exchange.

(Reporting by Ilaina Jonas and Helen Chernikoff; additional reporting by Dan Wilchins, Dena Aubin and Paritosh Bansal; Editing by Lisa Von Ahn, Gerald E. McCormick, Matthew Lewis, Gary Hill)

Australia Westfield Group