(Updates with breakup fee in sixth paragraph.)
Dec. 5 (Bloomberg) -- The estate of Lehman Brothers Holdings Inc. is trying to raise money for a possible counterbid to Equity Residential’s deal for a 26.5 percent stake in U.S. apartment owner Archstone, according to a person with knowledge of the situation.
Lehman, which owns 47 percent of Archstone, is in discussions with investors including Blackstone Group LP and Brookfield Asset Management Inc. to arrange financing, said the person, who asked not to be named because the negotiations are private. Equity Residential said Dec. 2 that it agreed to pay $1.33 billion to buy the interest from Bank of America Corp. and Barclays Plc, which together hold 53 percent of Archstone.
The agreement with Equity Residential, the Chicago-based landlord controlled by billionaire Sam Zell, sets up a fight for control of Archstone, which owned all or part of 434 apartment complexes in the U.S. and Europe as of June 30. The deal is contingent on Lehman declining to exercise a right of first offer on the bid. The firm, in bankruptcy since 2008, has 10 days to give notice of a matching offer, two people with knowledge of the situation said.
“The Equity Residential bid may simply represent an opening salvo in what could be a long bidding process -- potentially continuing until the middle of 2012,” Andrew McCulloch, senior analyst at Green Street Advisors Inc. in Newport Beach, California, wrote in a note to clients yesterday.
Equity Residential has obtained a commitment from Morgan Stanley Senior Funding to provide a $1 billion bridge loan, the company said in a Securities and Exchange Commission filing dated Dec. 2. The company expects to fund the transaction with cash and an existing $1.25 billion credit facility, it said.
Equity Residential is entitled to receive a breakup fee of as much as $80 million if its deal doesn’t go through, according to the SEC filing.
McCulloch said Lehman has about 60 days for a bid. The extra time after the 10-day period is allotted to transfer funds, said the people familiar with the process, who asked not to be named because terms of the agreement aren’t public.
If Lehman matches the agreement, Equity Residential then has a 30-day option to purchase the other 26.5 percent owned by Bank of America and Barclays, according to McCulloch. The lenders are forbidden to discuss the sale of this second piece with any other parties until Lehman’s initial rights period is up and Equity Residential’s 30-day right has expired, he said.
Kimberly Macleod, a spokeswoman for Lehman, declined to comment, as did Peter Rose, a spokesman for New York-based Blackstone; Andrew Willis, a spokesman for Toronto-based Brookfield; and Peter Jakel, a spokesman for Archstone.
Lehman’s effort was reported yesterday by the Financial Times. The estate of the bankrupt securities firm estimates that Archstone’s equity value is $1 billion more than the $5 billion implied by Equity Residential’s bid, the newspaper said.
Equity Residential, the largest publicly traded U.S. apartment landlord, is seeking to gain a piece of a major rival as rental demand climbs. If successful, the real estate investment trust may be in a position to influence Archstone’s final ownership.
“The Archstone and Equity Residential portfolios are highly complementary,” David Neithercut, Equity Residential’s president and chief executive officer, said in the statement announcing the deal. “Since we believe that none of the current owners of Archstone is likely to be a long-term owner, acquiring this position allows us a role in determining, and perhaps even expediting, the ultimate outcome regarding Archstone.”
Equity Residential would like to own the entire company, Zell, the REIT’s chairman, said in an interview with the Wall Street Journal last week.
Bank of America, Barclays and Lehman couldn’t agree on a complete sale of Archstone because Lehman preferred to hold the assets until a public offering, two people with knowledge of the situation said in October. The firm acquired Englewood, Colorado-based Archstone with Tishman Speyer Properties LP for about $22 billion in 2007. The debt taken on in the purchase contributed to Lehman’s collapse in 2008 as credit markets froze and property values tumbled.
Apartment owners are benefiting from increased demand for home rentals as foreclosures mount and lenders tighten standards for mortgages. U.S. vacancies fell to a five-year low in the third quarter, enabling landlords to boost lease rates, according to property-research company Reis Inc.
Equity Residential owns or has investments in 417 properties in 15 states and the District of Columbia. The REIT is targeting Boston, New York, Washington, south Florida, southern California, San Francisco and Seattle for acquisitions and development, according to its most recent quarterly report. Archstone operates in all of those areas as well as Germany.
Morgan Stanley & Co. LLC served as Equity Residential’s financial adviser and Hogan Lovells as legal adviser, according to the SEC filing.
--With assistance from Brian Louis in Chicago. Editors: Kara Wetzel, Andreea Papuc.
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