After its initial bid for a 26.5 percent stake in Archstone was shut out by Lehman Brothers Holdings last month, Equity Residential has agreed to raise its bid for the remaining shares in the apartment giant held by Bank of America and Barclays to nearly $1.5 billion.
Equity Residential has reached an agreement with Bank of America and Barclays to extend its deadline for its exclusive right to acquire the remaining 26.5 percent interest in Archstone to 19 April, according to a statement released today by the Chicago-based REIT. As part of the extension agreement, the minimum price at which the sellers are obligated to sell this interest in Archstone to Equity Residential was increased to $1.49 billion from $1.33 billion.
If Equity Residential bids on these remaining shares, Lehman can evoke its right of first offer and buy the shares for the increased price, which would completely shut Equity Residential out and effectively make Lehman the full owner of Archstone. If Lehman does this, Equity Residential will receive a breakup fee of $80 million. In its statement, however, Equity Residential stressed that it “remains under no contractual obligation to acquire this interest in Archstone.”
In its annual earnings statement released 10 January, Equity Residential revealed it had incurred $4.4 million in expenses related to its pursuit of Archstone. The Chicago-based REIT originally had agreed to purchase the other half of the banks' shares in Archstone late last year for $1.33 billion. However, Lehman evoked its right of first offer and acquired those shares for the same price in January, effectively blocking Equity Residential's purchase agreement. Lehman, which previously owned 48 percent of Archstone prior to that purchase, now owns 73.5 percent of the multifamily giant.
If Lehman elects to pay $1.5 billion for the remaining 26.5 percent stake from Bank of America and Barclays, the bank may have to bring in an additional partner or partners to help finance the purchase. Sources familiar with the matter have told PERE that Lehman has spoken with firms including The Blackstone Group and Brookfield Asset Management to possibly arrange financing to complete the purchase. Although both Blackstone and Brookfield declined to comment, one source said that whoever helps provide financing also will be co-owner of Archstone.
In the January issue of National Real Estate Investor, Equity Residential’s founding chairman Sam Zell said the Chicago REIT is “very involved in this Archstone situation. We want to expand our footprint beyond where it is today. Those assets fit our objective. I don’t know how that situation will get resolved. But for Equity Residential, the deal is being driven strictly by the assets.”
Lehman initially tried to outright block the sale of the Archstone shares to Equity Residential, claiming in court documents filed in December that the Chicago-based REIT would be a “contentious” partner. After a two-day mini-trial held at bankruptcy court in January, US Bankruptcy Judge James Peck denied Lehman’s request to block the sale. Judge Peck did, however, approve Lehman's right of first offer shortly thereafter on 11 January.
This battle between Equity Residential and Lehman over ownership of Archstone follows the failure of Lehman, Bank of America and Barclays to agree over what to do with the troubled REIT. In June, the three firms could not decide whether to sell their stakes via an IPO, sell the company outright or to infuse some fresh capital into the platform. Following this communication breakdown, Bank of America and Barclays chose to sell their shares to the highest bidder.