By Joseph Checkler
Of DOW JONES DAILY BANKRUPTCY REVIEW
A Sam Zell acquisition of a stake in the Archstone apartment
company would create a "contentious partnership" that would
"inevitably impair the value of Archstone," a Lehman Brothers
Holdings Inc. (LEHMQ) real-estate executive said in court papers
last week.
In a Friday filing with U.S. Bankruptcy Court in Manhattan, the
co-head of Lehman's real-estate group said a plan by the two banks
that own the other 53% of Archstone to sell half their stake to
Zell's Equity Residential (EQR) values Archstone at least $1
billion lower than it could be worth.
"Equity Residential would effectively have the ability to
significantly impact the value of the Archstone enterprise,
single-handedly drive down the value of Archstone and hinder the
debtors' ability to exit their investment in Archstone," said
Jeffrey Fitts, a managing director at restructuring firm Alvarez
& Marsal, which took over for Lehman when it filed for
bankruptcy protection in 2008. Lehman owns the other 47% of
Archstone.
At a scheduled two-day hearing later this week, Judge James Peck
of U.S. Bankruptcy Court in Manhattan will decide whether Bank of
America Corp. (BAC) and Barclays PLC (BCS, BARC.LN) can move
forward with the sale of 26.5% of their stake to Zell. At a hearing
last month, Peck said he was "troubled" by the plan, calling it a
"sale to a threat" rather than a neutral party.
Lehman is suing the banks for breach of contract and is asking
Peck for an injunction to block any transfer of the banks'
interests in Archstone to Equity Residential, Archstone's largest
competitor.
Lehman, which is still under bankruptcy protection, needs court
approval to match Zell's bid. A preliminary injunction, it says,
will give it time to make a $66 million right of first refusal
deposit and close a purchase by Jan. 23.
A key issue in the dispute is an option for Equity Residential
to buy the other half the banks' Archstone stake if Lehman
exercises its right of first refusal to buy the first half.
Under the terms of the complicated deal, Equity Residential
could only buy 26.5% of Archstone, and it could never end up with
the banks' entire 53% interest. Lehman, however, can buy both
halves of the banks' stake, in effect "doubling down" on its
Archstone investment. The banks say Lehman is only upset that the
parameters of the deal could force it to pay more than Zell
would.
The banks' deal calls for Equity Residential to pay $1.325
billion for the stake and places a value on the company of about
$16 billion, including $11 billion in debt.
Lehman led a $22 billion leveraged buyout with real-estate
investor Tishman Speyer for Archstone in 2007 near the height of
the real-estate bubble, with Bank of America and Barclays providing
the financing. The two banks gained their ownership stakes after
the collapse of the commercial real-estate market led to a
restructuring of the deal.
Last month, Peck signed off on Lehman's $65 billion Chapter 11
plan. Proceeds from an Archstone initial public offering and other
property sales would eventually flow back to Lehman creditors under
the plan.
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection.)
-By Joseph Checkler, Dow Jones Newswires; 212-416-2152;
joseph.checkler@dowjones.com
--Patrick Fitzgerald contributed to this article.