Lehman Brothers Holdings Inc., which has approval for a $65 billion bankruptcy liquidation plan, will ask a judge to let it use $1.33 billion of the estate’s money to increase its stake in Archstone, its biggest real estate asset, according to a person familiar with the planned bid.
Equity Residential, founded by billionaire Chairman Sam Zell, said on Dec. 2 that it had offered Bank of America Corp. and Barclays Plc $1.33 billion for 26.5 percent of Archstone, or half of their stake.
Lehman, which owns 47 percent of Archstone and must inform the banks this week that it will match the Zell company’s offer, will tell the judge the investment is needed to protect the estate’s interest in the company, said the person, who declined to be identified because the discussions are private.
The purchase would be the first step in a Lehman plan to gain control of Englewood, Colorado-based Archstone, an owner of apartment developments across the U.S. and in Germany. The defunct securities firm seeks to sell or liquidate Archstone for at least $6 billion, according to another person with knowledge of the plan.
Lehman’s strategy depends on taking over Archstone, said that person, who declined to be named because the money-raising efforts are private. Lehman, which has been in discussions with Blackstone Group LP and Brookfield Asset Management Inc. to try and raise funds, also is talking with pensions and sovereign wealth funds, said a third person familiar with the plan who asked not to be identified because the negotiations are private.
Lehman has until Dec. 15 to notify the banks it will exercise its right to match Equity Residential’s offer, then until Dec. 25 to file a motion with the court and until Jan. 24 to get court approval for its purchase, two people with knowledge of the timetable said. Lehman also must obtain financing by the January deadline, said one of the other people.
Lehman, which filed the biggest bankruptcy in U.S. history in 2008, along with its affiliates has about $23 billion of available cash, according to court papers.
Lehman has said in regulatory filings that Archstone is worth “at least” $1 billion more than the $5 billion equity value portrayed by the Equity Residential offer. Apartment rents and property values are rising as the national vacancy rate fell to a five-year low in the third quarter, according to Reis Inc.
“Lehman believes that the EQR purchase price does not take into consideration the value of Archstone’s platform, including its management, which Lehman believes is the best in the industry, nor does it take into account Archstone’s valuable strategic position within the apartment industry,” the bankrupt firm said in a filing with the Securities and Exchange Commission last week.
Kimberly Macleod, a spokeswoman for Lehman, declined to comment on the firm’s plans for Archstone. Kerrie McHugh, a spokeswoman for Charlotte, North Carolina-based Bank of America, also declined to comment. Zell and Michael O’Looney, a spokesman for London-based Barclays, didn’t respond to e-mails seeking comment.
In addition to being able to match purchase offers, Lehman also has the right to sell part of its stake on a pro-rata basis along with Bank of America and Barclays, a so-called tag-along right, according to last week’s SEC filing. Bank of America owns 28 percent of Archstone and Barclays holds 25 percent.
As of Sept. 30, Archstone had stakes in about 428 apartment complexes with about 74,000 units, including some under construction, according to the company. The total comprises 179 properties with about 60,000 units in the U.S. and 249 sites with about 14,000 units in Germany.
Moody’s Investors Service said last week that it revised its rating outlook for about $4 billion of securities of Equity Residential and its debt-issuing unit ERP Operating LP from stable to developing.
Moody’s, based in New York, said Equity Residential’s acquisition of the Archstone stake could require a disproportionate share of management’s attention because of the complexity of the ownership structure.
Equity Residential, based in Chicago, may also get a negative outlook on the rating, indicating a potential rating cut from Baa2 on its preferred shares and from Baa1 on senior unsecured debt at ERP Operating if the acquisition is permanently leveraged, Moody’s said in a statement.
Archstone was acquired by Lehman in a $22 billion leveraged buyout with Tishman Speyer Properties LP in 2007. Lehman, which is selling some assets and buttressing others for a future sale, fetched $3.9 billion through June 30 from property sales, according to court papers. Chief Executive Officer Bryan Marsal has said real estate sales will continue through 2014.
The cash bid for the Archstone stake was reported late yesterday by the Wall Street Journal.
The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).