Lehman not happy with banks' deal to sell Archstone equity interests

By Caroline Salls

Pittsburgh, Dec. 5 - Lehman Brothers Holdings Inc. said a letter of intent from Bank of America, NA, Banc of America Strategic Ventures, Inc. and Barclays Bank affiliate BIH ASN, LLC in connection with an agreement to sell 50% of the banks' equity interests in Archstone does not comply with Lehman's agreement with the banks, according to an 8-K filed Monday with the Securities and Exchange Commission.

The banks were obligated to provide the letter of intent to Lehman before selling any equity interests held by them in various entities affiliated with Archstone, a privately held owner, operator and developer of multifamily apartment properties.

However, Lehman said it does not believe the notice includes all of the information that its agreement with the banks requires in order to trigger the launch of a 10-day period during which Lehman can elect to exercise its rights.

According to the 8-K, the banks entered into a purchase agreement on Dec. 2 with ERP Operating LP, together with general partner Equity Residential, under which the banks will sell half of their interests in Archstone, or 26.5% of the total Archstone equity interests, to the Equity Residential partnership for $1.325 billion.

Under the agreement, the sale is subject to Lehman's right to either purchase the banks' equity interests to be sold or exercise its "tag-along" right and sell a portion of its equity interests in Archstone.

Lehman said the interest purchase agreement does not provide any certainty for the full exit of the banks' equity interests in Archstone.

As a result, Lehman said any exercise of a "tag-along" right would also subject it to significant uncertainty regarding the value of its remaining Archstone equity interests and its ability to ultimately liquidate these remaining interests.

Specifically, Lehman said Equity Residential's agreement with the banks is not an offer for 100% of the equity interests of Archstone and, therefore, it is inappropriate to imply that the purchase price and terms offered for 26.5% of the equity interests would be offered for the entire enterprise.

Even if the proposed purchase price was extrapolated into an offer for all of Archstone, "it would be inadequate," Lehman said.

Lehman said it believes that a net asset valuation of the Archstone enterprise would suggest at least an additional $1 billion of value over the value for the entire Archstone enterprise that would be implied by the purchase price.

Management team key

Lehman said the purchase price does not take into consideration the value of Archstone's platform, including its management, nor does it take into account Archstone's valuable strategic position within the apartment industry.

Lehman said Sam Zell, chairman of Equity Residential's board of trustees, has been quoted saying Archstone's existing management platform has no value to the Equity Residential partnership because it would be redundant.

Lehman said in the 8-K that "it is vital to retain the Archstone management team."

Equity sale process

According to the 8-K, the banks and Lehman received a number of proposals to acquire all of the banks' equity interests in Archstone during the past summer.

During this process, Lehman said Equity Residential made a non-binding proposal to purchase the equity interests held by Lehman and the banks for cash and stock.

Lehman said it found that offer unacceptable and rejected it based on a range of options Lehman believes exists for its Archstone equity interests.

However, Lehman said the banks informed it that they would continue to negotiate with the Equity Residential partnership and other bidders to solicit offers.

Lehman chose not to market its equity interests in Archstone at that time, according to the 8-K.

Although the banks were marketing their equity interests in Archstone and negotiating with potential bidders, Lehman said the banks did not give it the required information, despite repeated requests.

Lehman said it appears that the banks and the Equity Residential partnership have timed the delivery of their notice shortly before Lehman's Dec. 6 plan confirmation hearing and the election of its new board of directors to optimize the chance that Lehman will not exercise its rights.

According to an Equity Residential news release, if the "remaining significant Archstone owner" declines to exercise its right and all other closing conditions are met, the acquisition would occur late in the first quarter of 2012.

Equity Residential option

Lehman said Bank of America and Barclays also separately sent copies of a second interest agreement with Equity Residential, which gives the Equity Residential partnership the option to purchase all equity interests held by the banks in Archstone, other than the interests to be sold under the purchase agreement, for a purchase price equal to or greater than $1.325 billion.

This sale would be completed on mostly the same terms as under the first interest purchase agreement.

Lehman said the option granted to the partnership under the second interest agreement is exercisable only if Lehman exercises its right to purchase the equity interests that are subject to the banks' first interest purchase agreement.

According to the 8-K, Lehman does not believe that the banks' execution of the second interest agreement would be in compliance with its agreement with the banks.

New York-based Lehman Brothers Holdings was the fourth-largest investment bank in the United States. The company filed for bankruptcy on Sept. 15, 2008 in the U.S. Bankruptcy Court for the Southern District of New York. Its Chapter 11 case number is 08-13555.

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