Equity Residential, the apartment company headed by real-estate mogul Sam Zell, has emerged as the lead bidder in the contest to buy roughly half of rival Archstone in what would be one of the largest real-estate transactions since the downturn, according to people familiar with the situation.
Equity Residential has offered more than $2.5 billion in cash and stock to buy the 53% equity stake in Archstone currently held by Bank of America Corp. and Barclays PLC, the people said. An agreement is still uncertain and a higher bidder could step in.
Bloomberg NewsSam Zell's Equity Residential has offered to buy a 53% equity stake.
The rest of the company is owned by the bankruptcy estate of Lehman Brothers Holdings Inc., which led a group that purchased Archstone in 2007 and is keeping its holding. Lehman and the banks earlier this year disagreed over how to unwind Archstone, leading the banks to put their stakes up for sale.
The bid from Mr. Zell, a storied real-estate industry maverick, is the latest sign of the high level of interest among investors in rental apartments. While other forms of commercial property have suffered from high vacancy rates, apartment buildings have enjoyed high demand as home ownership rates have fallen.
The proposed sale to Equity Residential would value Archstone at about $16 billion, including some $11 billion in debt held mostly by government-sponsored mortgage companies Fannie Mae and Freddie Mac, the people said. At the time of the buyout, Archstone was considered the crown jewel in Lehman's commercial real-estate portfolio and was valued at about $22 billion.
The lower valuation for Archstone partly reflects the $2 billion in assets the company has sold since the Lehman buyout, leaving it with stakes in about 77,000 apartments. Equity Residential, which owns stakes in 119,000 units, also would be getting a discount because it would be buying into a contentious partnership, and no single owner of Archstone can make major decisions without unanimous consent.
If sold as a whole company, Archstone currently could be worth as much as $18 billion, according to Craig Leupold, an analyst with Green Street Advisors.
Barclays and Bank of America also received bids from three other firms: apartment company AvalonBay Communities, Inc., private-equity firm Blackstone Group LP and Brookfield Asset Management Inc., a Canada-based investment firm, according to people familiar with the matter.
If Equity Residential wins the bidding, it could set up a high-stakes battle with Lehman over control of Archstone, pitting Lehman, which is now being steered by the restructuring firm Alvarez & Marsal, against the 70-year-old Mr. Zell, who has developed a reputation as a motorcycle-riding, casual-dressing risk-taker.
Mr. Zell, who is chairman of Equity Residential, declined to comment through a spokeswoman. In an interview earlier this month in Barron's magazine, Mr. Zell said that he favors rental apartment buildings over other forms of commercial property like office and retail. "The housing bust has made renting a much more popular alternative," he said. "Many no longer regard residential real estate as an investment vehicle, and renting allows them to avoid a large down payment and maintenance costs."
Daniella Zalcman for The Wall Street JournalAn Archstone apartment building at 800 Avenue of the Americas in New York. Sam Zell's Equity Residential has bid for part of the firm.
At the end of the third quarter, 5.6% of the nation's apartments were vacant, down from 5.9% in the second quarter, and the lowest level since 2006, according to Reis Inc., a real-estate data service. Strong demand for apartments also has pushed up the value of multi-family property to record levels in some markets.
This rosy outlook has caused Equity Residential's shares to climb, giving the company valuable currency to bid on Archstone. The company's shares closed at $58.75, up 99 cents, in composite New York Stock Exchange trading Tuesday. That price is above its 2007 peak price of $55, though down some from its all-time high of more than $63 a share in July.
Lehman could block Equity Residential because it has a "right of first offer," meaning that the banks must present Lehman with any offer they would like to accept and give the estate a chance to match it. Concerned about Equity Residential's bid, Lehman is in talks with Blackstone and Brookfield about bringing in the firms to match the offer, according to people familiar with the matter.
For much of this year, Lehman, Barclays and Bank of America have been tussling about how to dispose of Archstone, with Lehman favoring taking the company public once again with a stock-market offering, and the other banks favoring selling the company in a private transaction.
Lehman is concerned about having Equity Residential as a partner partly because the apartment company already has a large management operation of its own. Lehman fears that Equity Residential may seek to replace Archstone's management team and apartment management operation, which Lehman values at more than $1 billion, with their own managers, according to people familiar with the matter.
The deal would be, by far, the biggest investment made since the downturn by Mr. Zell, who made an enormous fortune during previous periods of carnage in the commercial real-estate industry through well-timed buying. He and his companies have bought relatively little during the current downturn, during which Mr. Zell has been distracted by his disastrous foray into publishing with his purchase of Tribune Co.
Equity Residential's shares closed at $58.75, up 99 cents, in composite New York Stock Exchange trading Tuesday.
via online.wsj.com