Strategic Moves Continue As EQR Gets Extension of Right to Make Formal Bid On Remaining 26.5% Stake In Apartment Company
The high-stakes match for control of Archstone continues, with Equity Residential (NYSE:
EQR) making the latest move. Keeping its options alive to acquire at least a piece of the Denver-based apartment company, EQR reached an agreement this week with Barclays PLC and Bank of America on a 60-day extension of its deadline to make a formal offer to acquire the banks' remaining interest in Archstone.
Equity Residential, one of the nation’s largest owners and developers of apartments, and its chairman and founder, Sam Zell, faced a Feb. 19 deadline to exercise its option to acquire the remaining 26.5% interest in Archstone. Rather than make an offer, EQR strategically opted to negotiate an extension until April 19 -- and significantly, to negotiate an increase in the minimum price at which the banks are obligated to sell their interest from $1.33 billion to $1.485 billion.
That means that if EQR’s offer for Archstone matches or exceeds the minimum price, and BofA and Barclays decide to sell their stake to majority owner Lehman Bros. Holdings Corp. under its right of first offer, Equity Residential would receive the maximum transaction breakup fee -- a hefty $80 million, according to a Securities and Exchange Commission filing by the Chicago-based apartment REIT.
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Equity Residential has not yet made a formal offer. If and when it does, Lehman -- which now owns 73.5% of Archstone after paying $1.325 billion in January for half of a 53% stake held by BofA and Barclays -- has a right to match the offer.
However, it would come at a higher cost for Lehman, which is also facing a time clock that is winding down as the investment bank tries to exit one of the largest bankruptcies in history as early as this month.
In a research note, Sandler O'Neill + Partners REIT analysts Alexander Goldfarb and James Milam said they expected EQR to raise its bid to more than the $1.45 billion that allows it to collect the maximum breakup fee, in order to drive up Lehman’s cost of matching the offer and give it a smaller window of time to put together a deal.
Given that EQR's driving objective is to own all or part of Archstone rather than simply collect the breakup fee, Goldfarb and Milam opined that the Chicago REIT will probably continue to keep its options open to buy the banks' remaining stake.
However, given Lehman's strong desire to own all of Archstone, bolstered by its first-offer rights, "it is tough to envision a situation where EQR walks away with the banks' 2nd tranche without bidding so much that [Lehman] exercises its tag-along rights," the analysts wrote.