Lehman estate could scupper Archstone deal
The estate of bankrupt Lehman Brothers believes that Archstone – the apartment company that Bank of America and Barclays have agreed to sell part of their stakes in – is worth $1bn more in equity value than the price at which the two banks have struck their deal, people familiar with the matter said.
The estate is considering mounting a matching bid to derail the banks’ deal with Equity Residential, the real estate company headed by Chicago mogul Sam Zell.
EQR said late on Friday that it had agreed to pay $1.325bn in cash for a 26.5 per cent stake in Archstone, which was taken private at the height of the property boom. The deal values it at about $16bn including debt.
However, the agreement with EQR triggers a right of first refusal for the estate of the investment bank, which filed for bankruptcy in 2008, to buy the stake. People familiar with the matter said that should Lehman exercise its right to match the offer, the banks have also agreed to grant EQR an option on their remaining 26.5 per cent stake.
The estate has repeatedly clashed with Bank of America and Barclays about how to unwind the group’s holding in Archstone.
While the estate is focused on maximising value and could seek an initial public offering for Archstone in the future, Barclays, with 25 per cent of the company, and Bank of America, which owns 28 per cent, have been pushing a quicker sale.
People familiar with the situation said that the estate sees another $1bn in Archstone’s equity value over the $5bn valuation reflected in the EQR deal.
The purchase price agreed by Equity Residential represents a capitalisation rate – the properties’ net operating income relative to the total value – of 5.3 per cent. That is slightly above where listed peers such as AvalonBay and Equity Residential itself trade, with some analysts arguing that Archstone could command a premium to rivals because of the rare opportunity to buy a nationwide portfolio of prime apartment properties.
The estate has 10 days to mount a matching bid for the stake. It has for months been talking to potential backers, including Blackstone and Brookfield Asset Management who both participated in the auction for the banks’ stakes, about helping finance a bid to consolidate Archstone’s ownership.
While the bank’s stakes are purely financial, striking a deal with the estate could win an investor such as Blackstone or Brookfield more control over Archstone’s portfolio of prime residential property.
However, it is not clear under the terms of the original agreement whether the estate can bring in a partner at this time, said people familiar with the matter. The estate must also agree with the creditors’ committee in order to mount a bid.
Archstone’s portfolio includes 48,922 apartment units as well as 1,332 apartments under construction and land sites for future development. Morgan Stanley advised Equity Residential on the deal, while Barclays and Bank of America advised themselves. Gleacher & Company are advising the Lehman estate.
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