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News analysis: Rumble in the concrete jungle

Lehman Brothers has no time to celebrate its move to emerge from bankruptcy, as it is gearing up to fight for control of the largest real estate asset on its books: Archstone.

Amid celebrating its first steps towards exiting bankruptcy, the estate of former Wall Street banking giant Lehman Brothers is gearing up for a fight; possibly, it’s last big fight. To continue the boxing metaphor, the purse is the largest real estate asset still on Lehman’s books and the major cause for its initial collapse—Archstone.

Last week, Judge James Peck approved Lehman’s plan to exit Chapter 11 protection in US bankruptcy court in New York and even described a hearing as “remarkably consensual”. Yet a few days prior to that, Equity Residential reached an agreement to buy a 26.5 percent ownership interest in Archstone from Bank of America and Barclays for $1.33 billion. This represents half of the banks’ ownership stakes in the troubled apartment giant.

If the deal goes through, the Sam Zell-run REIT would be a minority owner of the platform. Lehman, however, is saying ‘not so fast’. It wants to gain control of the investment, and reports suggest the Lehman estate is preparing a $1.33 billion cash offer to buy the chunk of Archstone it doesn’t already own. It currently holds 47 percent. 

As part of its spoiling tactics – ‘holding’ in boxing parlance – Lehman filed a document with the SEC a fortnight ago challenging the validity of Equity Residential’s offer for a minority stake in Archstone. The estate suggested that the deal was deliberately timed shortly prior to Lehman’s hearing to optimise the chance that Lehman would not exercise its rights of first refusal. In addition, Lehman contested Equity Residential’s offer because it “believes better alternatives exist for maximizing value”.

Indeed, this quagmire may be the result of multiple parties being unable to agree on the value of the platform. Some sources suggest that Equity Residential is only interested in the real estate under Archstone’s ownership, while it’s looking as though Lehman has the view that holding off selling the asset, maintaining its management team and selling it in a few years is the smart way to go. After all, Lehman does have some creditors to pay off over the next three years.

“Right now, high-quality multifamily is a preferred asset class for institutional investors,” said Doug Weill, co-founder of advisory firm Hodes Weill & Associates, commenting on the inherent value of the Archstone platform.
“The pricing has made this a core investment, which is very attractive to institutional investors,” agreed one source familiar with the situation.

As a result, Lehman Brothers is looking to match – and therefore negate – Equity Residential’s offer.

Bricks and dollars
So how does Lehman plan to raise enough capital to take control in such short order? Sources familiar with the matter have told PERE that Lehman is talking with The Blackstone Group and Brookfield Asset Management to arrange financing to buy the stake Equity Residential has bid on. Although Blackstone and Brookfield are both tight-lipped about their involvement, it appears as though whomever provides financing also will be co-owner of Archstone.

If this is indeed the route the Lehman estate is taking, given the inherent value of Archstone, it may not have much difficulty in finding financing. “If Lehman needs to find capital, I don’t think there will be a shortage of partners [to provide the money],” said Weill.

Ultimately, with both opponents refusing to blink or back down, this fight could get dirty, and there will no doubt continue to be a great deal of surprises and upsets as this unfolds. But, with Lehman’s reogranisation plan approved by the courts and about to emerge from bankruptcy, it makes sense that they’d want to hang tight to such a lucrative asset.

However this match ends, it looks as though both Lehman and Equity Residential intend to go the distance. You could say the fight is the ultimate 'rumble in the concrete jungle.'