UPDATE: Lehman, Banks Spar Over Sale Of Archstone Stake To Zell
January 05 2012 - 4:39PM
Dow Jones News
Lehman Brothers Holdings Inc. (LEHMQ) sparred in court Thursday
with Bank of America Corp. (BAC) and Barclays PLC (BCS, BARC.LN)
over the future of the Archstone apartment company if a big stake
in the firm ends up in the hands of its biggest rival, Sam Zell's
Equity Residential (EQR).
The banks are trying sell half of their combined 53% stake in
Archstone to Equity Residential for $1.33 billion. Lehman, which
owns the rest of Archstone, is balking at the deal.
Thursday, a Barclays lawyer pressed the case that Lehman already
had signed off on a possible sale to Equity Residential by the
banks in 2009 and referenced a judge's prior characterization of
Zell's company as an "elephant in the room."
"Your honor, in 2009, Lehman put up a sign that said 'elephants
welcome,'" Orrick Herrington & Sutcliffe LLP's Joseph J. Frank,
the Barclays lawyer, told Judge James Peck of U.S. Bankruptcy Court
in Manhattan.
Frank said Lehman "doesn't like EQR, and they don't want to pay
a market price for the second half of the banks' interest."
A key issue in the dispute is an option for Equity Residential
to buy the remaining half of the banks' Archstone stake if Lehman
exercises its right of first refusal to buy the first half.
Essentially, Lehman wants to step in and pay the banks the $1.33
billion to acquire the 26.5% stake that Zell is trying to buy.
Lehman then wants to purchase from the banks the other 26.5% of
Archstone for that same price.
The banks have no problem with Lehman stepping in and buying
half of their stake for $1.33 billion, but they want Lehman to pay
a higher "market" price if it wants to buy the second half.
"They will still be saving boatloads," said Frank, the Barclays
lawyer. On the witness stand, Jeffrey Fitts, Lehman's co-head of
real estate, said a conservative estimate of what Lehman may have
to pay for the second half of the banks' stake would be about
$1.445 billion.
Another key issue at Thursday's hearing was a large breakup fee
that would be paid to Zell if a bidding war ensued for the second
half of the banks' stake.
At Thursday's hearing, Peck listened to arguments about whether
he should issue a preliminary injunction that would halt the Zell
deal. The banks and Lehman spent much of the morning figuring out
how to proceed with the hearing, eventually deciding to admit all
filings in the case as evidence to be sorted out by Peck while only
one witness would take the stand rather than several.
On the stand, Fitts said a partnership with Zell's Equity
Residential would hurt Lehman. Questioned by a lawyer for Equity
Residential, Fitts did say that Lehman's and the banks'
relationship over the Archstone investment has itself not been
ideal for past few months.
"I believe that they were going in a different direction," Fitts
said.
The hearing will continue Friday, when closing arguments will be
made.
Lehman, which is still under bankruptcy protection, needs court
approval to match Zell's bid. A preliminary injunction, it said,
would give it time to make a $66 million right-of-first-refusal
deposit and close a purchase by Jan. 23.
Under the terms of the deal, Equity Residential could buy only
26.5% of Archstone, and it could never end up with the banks'
entire 53% interest. Lehman, however, could buy the banks' entire
stake, in effect "doubling down" on its Archstone investment. The
banks' lawyers said Lehman is only upset that the parameters of the
deal could force it to pay more than Zell would.
Cleary Gottlieb Steen & Hamilton LLP's Lawrence B. Friedman,
a Bank of America lawyer, earlier in the day concurred with Fitts's
later testimony that the banks' and Lehman's interests are
currently misaligned: Lehman wants to own Archstone for the medium
and long term, while the banks want to sell quickly.
The $1.33 billion Equity Residential deal values Archstone at
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
financing. The two banks gained their ownership stakes after the
collapse of the commercial-real-estate market led to a
restructuring of the deal.
(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.
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