Lehman Seeks to Pay $2.6 Billion for Archstone Stake

Lehman Brothers Holdings Inc. wants to buy a 53 percent stake in Archstone held by Bank of America Corp. and Barclays Plc for $2.6 billion, even if a rival offer is higher, the bankrupt firm told a judge.

Lehman, which has said it aims to sell Archstone for $6 billion to help pay creditors, is first seeking to gain control by buying the banks’ stake. Sam Zell’s Equity Residential, Archstone’s rival in the apartment business, holds an option to buy half of the banks’ stake in the company at a still undetermined price.

Through the option, “EQR got the cheapest seat at the table that it could,” Paul DeFilippo, a lawyer for New York-based Lehman, said at a court hearing today before U.S. Bankruptcy Judge James Peck in Manhattan. “It could exert leverage to buy 100 percent of Archstone.”

Archstone is the largest real-estate asset of Lehman, which is embarking on a $65 billion liquidation plan after three years in bankruptcy court. After agreeing to pay the banks $1.3 billion for 26.5 percent of Archstone, Lehman is asking Peck to rule that it has the right to take Zell’s option to the rest of the banks’ stake at the same price.

Right to Sell

Joseph Frank, a lawyer for London-based Barclays, told Peck that the banks have a right to sell their Archstone stakes at a market price. If Zell values the second piece of their holding at more money, Lehman should match his offer.

According to Frank, Lehman executives told directors at a Dec. 8 board meeting that they expected to pay about $1.4 billion for the second half of the banks’ stake, not $1.3 billion.

“That was before Lehman sued us,” he said.

Lehman sued the banks on Dec. 15 for breach of contract, saying they colluded to sell a stake to Zell’s company, Archstone’s “largest competitor.”

“Lehman doesn’t like Equity Residential,” Frank said. “If they want to keep the elephant out of the tent they can. They just have to pony up.”

Bank of America has a contractual right -- and a duty to its shareholders -- to take the highest price for its stake in Archstone, which Lehman is trying to take away by setting a ceiling of $2.6 billion, the bank’s lawyer Lawrence Friedman told Peck.

The ceiling price isn’t necessary, he said.

‘It’s Refundable’

“If a judge says the amount Lehman pays is too much, they can get a refund. It’s refundable,” he said. “So how are they directly damaged” by the option given to Zell?

By contrast, a delayed sale of the stake would “subject the bank’s shareholders to continuing market risk,” Friedman told Peck.

Zell’s Equity Residential took an option to invest in Archstone because it shares the view that there is value in the apartment company, even if its estimate is lower than the $6 billion valuation of Lehman, a lawyer for Equity Residential said.

The option ensured that Zell would have a second chance to invest in Archstone if Lehman bought part of the banks’ stake, said the lawyer, Craig White.

Equity Residential, an investor in multifamily housing, is in the business “for the long haul,” White said. In that sense, the Zell company’s interests differ from those of the banks, which are eager to sell their stakes, he said.

Leveraged Buyout

Archstone, which Lehman acquired in a $22 billion leveraged buyout with Tishman Speyer Properties LP, has ownership interests in hundreds of apartment developments from Washington and New York to San Francisco. Lehman and the banks made loans, which they later converted to equity after Archstone faltered in the 2008 credit crisis.

Lehman holds 47 percent of the equity in Archstone.

The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The complaint is Archstone LB Syndication Partner LLC v. Banc of America Strategic Venture Inc. (In re Lehman Brothers Holdings Inc.), 11-02928, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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