UPDATE 3-Equity Residential gets Archstone-bid extension

Wed Feb 22, 2012 4:42am IST

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* Equity Residential given 60 more days to make offer

* Minimum bid price for stake raised to nearly $1.5 bln

By Ilaina Jonas

Feb 21 - Equity Residential, one of the largest U.S. apartment owners, said it has been granted more time to submit a bid for 26.5 percent of smaller rival Archstone, albeit at a higher minimum price of nearly $1.5 billion.

Lehman Brothers Holdings Corp owns the remainder of Archstone, a landlord of apartment buildings, many of which are high-end towers in pricey urban locations.

Under an amended agreement with Bank of America Corp and Barclays Plc, joint owners of 26.5 percent of Archstone, Equity Residential will have until April 19 to make a bid for the stake. The prior deadline was Feb. 19.

The agreement could give Equity Residential time to make a bid for some or all of Archstone. And it could put pressure on Lehman by significantly reducing the amount of time it has to come up with a matching offer.

The revised agreement, reached on Feb. 17 and announced on Tuesday, also raises the minimum bid for the stake to $1.485 billion from $1.325 billion.

Lehman, last month, raised its stake in Archstone to 73.5 percent when it paid $1.325 billion for half of a 53 percent stake held by Bank of America and Barclays.

Equity Residential and its chairman, real estate mogul Sam Zell, have been in pursuit of Archstone for months, making no bones about their desire to own the company.

Equity Residential had first sought to buy half of the 53 percent of Archstone owned by the two banks but lost out last month when Lehman matched its offer of $1.325 billion.

That triggered the second part of Equity Residential's offer: a bid for the remaining 26.5 percent, at a price equalling or exceeding the amount paid by Lehman for the first 26.5 percent.

If Equity Residential makes an offer, Lehman has the right to match it. If Lehman does, the agreement requires the banks to pay Equity Residential a $80 million break-up fee.

The extra 60 days could give Equity Residential leeway to negotiate a deal directly with Lehman, UBS analysts said. But it also puts pressure on Lehman, which is expected to exit bankruptcy protection as early as this month.

While operating under bankruptcy protection, Lehman has 50 days to match an Equity Residential offer. Once out of bankruptcy, it will have a significantly shorter time.

Lehman bought publicly traded Archstone-Smith in a $22 billion leveraged buyout in 2007 with financing from Barclays and Bank of America. The banks gained a big equity stake in Archstone through two restructurings. Those restructurings gave each of the partners veto power over major decisions on Archstone and any sale of the company or its assets. If Equity Residential buys the 26.5 percent stake, it would inherit that veto power.

An Equity Residential veto could make it difficult for Archstone to sell itself or its assets to others or sell itself by becoming a publicly traded company again.

UBS analysts said they believe the extra time would give Lehman time to negotiate a deal with Equity Residential to walk away from Archstone in exchange for certain apartment buildings.

On the other hand, the higher price and extension open the door for Equity Residential and Lehman to agree on a price for all of Archstone's properties.

The revised agreement also contains provisions for the banks to be compensated for the break-up fee should Equity Residential acquire interest in Archstone or buy it later at a higher price.

A spokesman for Equity Residential declined to comment. A representative from Lehman Brothers did not return phone calls seeking comment.

Apartments have been the brightest sector within the U.S. commercial real estate, with rents rising strongly. Meanwhile new construction has remained at lowest levels in nearly 20 years, according to Chandan Econometrics, which tracks the impact the economy and financial markets have on real estate.

In turn, investors have willingly accepted low yields on their initial investments, as they pay higher and higher prices for assets they believe will continue to generate increasing revenue and profits.

As for Lehman, whose bankruptcy in 2008 set the U.S. financial system into a downward spiral, Archstone is key part of its plan to emerge from Chapter 11, which could happen shortly. With its 73,555 apartments in the United States and Europe, Archstone represents an important part of its plan to raise $65 billion for the benefit of creditors. Archstone is among Lehman's most valuable holdings.

Equity Residential has 121,974 apartments in 15 states and Washington.

Shares of Equity Residential closed down 1.7 percent at $57.54 Tuesday. The MSCI US REIT index was off 1.5 percent.

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