Zell And Lehman Battle For Archstone

Includes: BAC, BAM, BCS, BX, EQR
by: Mike Maher

The leveraged buyout of Archstone-Smith Trust by Lehman Brothers and Tishman Speyer in late 2007 was a deal done almost exactly at the top of the market, which saddled Lehman with crushing debt that helped push the investment bank into bankruptcy. Four years later, with a new buyer circling Archstone, Lehman is scrambling to salvage the deal, loath to give up on the company.

Sam Zell, Chairman of Equity Residential (NYSE:EQR), has stated that the firm's bid to buy a 26.5% stake in Archstone from Bank of America (NYSE:BAC) and Barclays (NYSE:BCS) is a first move in his attempt to acquire control of the company. The deal values Archstone at $16 billion, including $11 billion in debt. Up until now, Lehman Brothers, which owns 47% of Archstone, had been trying to convince its partners in Archstone that an IPO of the company, which owns more than 400 apartment complexes in major US markets such as New York, Washington, and San Francisco, would be the best way to exit the investment. But with the deal between EQR and Bank of America and Barclays, who together own the other 53% of Archstone, Lehman has begun to explore buying more of Archstone. Reports are out that Lehman is in talks with The Blackstone Group (NYSE:BX) and Brookfield Asset Management (NYSE:BAM) to arrange financing to buy the stake EQR has bid on, since Lehman has right to match the EQR bid. However Bank of America and Barclays have granted EQR a 30-day option to buy the other 26.5%, complicating Lehman's desire to keep Archstone together.

While reports of Blackstone's and Brookfield's involvement are limited, it appears for now the firms would only be providing financing to Lehman, not taking an ownership stake in Archstone. Blackstone has focused its investment activity toward commercial real estate like malls and hotels, so taking a stake in Archstone would be a somewhat new avenue for Blackstone. Acquiring a stake in Archstone would vault Blackstone into a prominent position in the apartment rental space, if it chose to go that route. As for Brookfield, the firm states in its investment guidelines that it seeks to take a lead role in investments, although in a rare case such as Archstone it may agree to work with partners, as was the case in General Growth Partners (NYSE:GGP). While each firm has yet to comment on the deal, I'm sure each will take a hard look at the books of this company.

Lehman has responded to EQR's bid, saying that the offer for Archstone was too low, and that Barclays and Bank of America failed to notify Lehman of negotiations with EQR, as they are required. With the deal being announced mere days before Lehman headed into court this week over that firm's bankruptcy reorganization, the firm also questioned the timing of the deal. Lehman is now said to be looking to line up at least $2.6 billion in financing in order to buy the remaining 53% of Archstone. It looks as if the bid from EQR is just a starting volley in a struggle for Archstone that could drag on into 2012.

With big players like Sam Zell, Lehman Brothers, Bank of America, and Blackstone all swirling around a potential $16 billion real estate takeover, it almost feels like the heady days of 2007 all over again. As the saga continues to play out, remember that this is merely the first round for control of Archstone. Lehman will need to look to either sell or bring public Archstone should it win control, in order to pay claims related to its bankruptcy.

Disclosure: I am long BAC, BX.

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