* Decision to back off hinged on Simon's failure to bid
* Pershing Square returns to being passive investor in GGP
* Decision comes as Ackman engages in high profile dispute with Herbalife
By Svea Herbst-Bayliss and Sagarika Jaisinghani
Jan 3 (Reuters) - After months of trying to play matchmaker between the two largest U.S. shopping mall operators, activist investor William Ackman reversed course on Thursday, saying he is no longer pushing for a sale because one party didn't want to buy.
Since late August, Ackman has argued publicly and often that No. 1 mall operator Simon Property Group (SPG) should bid for slightly smaller rival General Growth Properties (GGP), the second-largest mall operator after Simon first made noise about a possible bid for GGP in 2011.
But with no signs of a deal, Ackman, whose $11 billion Pershing Square Capital Management owns an 8 percent stake in GGP, declared himself satisfied with the status quo and said he would return to being a passive investor.
Ackman is retreating on the mall operators at a time he is devoting fresh energy to other assets in his portfolio and the decision may foreshadow an eventual exit from GGP.
"The announcement this morning makes sense because Bill Ackman has been making a lot of headlines lately and sometimes it is good to be seen in a quieter light," said one investor in Pershing Square who did not want to be identified because the fund is private. "You can only push an investment thesis so far, and I suspect that reading between the lines here, Ackman is beginning to prepare to try and get out of this name as smoothly as possible," the investor added.
Only a few weeks ago, Ackman made a huge splash when he publicly announced that Pershing Square is shorting supplements company Herbalife's stock after research suggested to him and his analysts that the company is operating a pyramid scheme.
For Ackman, the efforts with the mall operators were close to his heart. Pershing Square's investment in GGP still ranks as the fund's most lucrative ever, providing a 77-fold return after the stock was bought years ago and held through bankruptcy.
A sale to Simon would have helped push GGP's stock price even higher and perhaps prevented Brookfield Asset Management , which owns a 42 percent stake in GGP, from taking full control without paying for it, Ackman argued in regulatory filings and at public conferences.
In October, Ackman said that if a deal were closed between Simon and GGP at that time, the stock price should be trading at $29 a share by year's end.
But General Growth's shares rose only 9 percent since Ackman first urged the company to consider a sale. On Thursday the stock fell 2.9 percent to $19.46.
So in retreating, the New York-based hedge fund manager, known for telling some of America's biggest companies how to make more money for shareholders, explained that the reason for the change of heart hinges largely on Simon.
"In that SPG has chosen not to go forward with that or any other potential transaction with (GGP), and Brookfield Asset Management Inc. and its affiliates have subsequently agreed to modify Brookfield's governance arrangements with (GGP), the Reporting Persons (Ackman and Pershing Square) no longer believe that (GGP)should consider a sale of the Company and it should therefore remain an independent publicly traded corporation," the filing said.