Lehman agrees to sell Archstone stake for $6.5 billion in cash, stock

By Caroline Salls

Pittsburgh, Nov. 26 - Lehman Brothers Holdings Inc. entered into a definitive agreement to sell full ownership of Archstone Enterprise LP, its single largest asset, to Equity Residential and AvalonBay Communities, Inc. for cash and stock with total value of $6.5 billion, according to a company news release.

Specifically, Lehman and its affiliates, including Lehman Commercial Paper Inc., will receive $2.685 billion in cash, 34.47 million shares of Equity Residential common stock and 14.89 million shares of AvalonBay common stock.

On a combined basis using Nov. 23 closing prices, the company said the shares are worth $3.8 billion.

As a result of the transaction, Lehman and its affiliates will own 9.8% of Equity Residential and 13.2% of AvalonBay.

According to an Equity Residential news release, the purchase price also includes the assumption of $9.5 billion of debt and $330 million of preferred equity.

Of the debt to be assumed, Equity Residential said $8.6 billion is held by Fannie Mae and Freddie Mac, each of which has agreed to the assumption of this debt by Equity Residential and AvalonBay.

The buyers have up to 120 days to close the transaction, which is not subject to a vote of the shareholders of either Equity Residential or AvalonBay and does not have any financing contingencies.

Sale background

Lehman said this transaction comes after it purchased the remaining 53.6% stake in Archstone that it did not own earlier this year.

During the six months since the completion of the purchase, Lehman said it actively evaluated a broad range of monetization alternatives for the company, including filing for an initial public offering in August.

According to the Lehman release, the $6.5 billion transaction price represents a significant return on Lehman's purchase for an implied value of $5.55 billion of the remaining 53.6% interest it did not own.

In addition, the company said the $2.7 billion cash component of the sale consideration substantially returns the $3 billion investment it made in the Archstone purchase.

"The sale of Archstone to Equity Residential and AvalonBay is a very positive outcome for our creditors," Lehman board chairman Owen Thomas said in the release.

"The transaction delivers significant return on the investment we made earlier this year to fully control Archstone and has generated immediate and considerable proceeds for our next distribution to creditors.

"Further, we believe our shareholdings in EQR and AVB, both industry leading companies with significant market capitalization and trading below their respective consensus net asset values, provide us with the potential for further appreciation and substantial liquidity for our remaining investment."

Purchase price funding

Equity Residential said it will pay its portion of the transaction consideration with $2.016 billion in cash and the issuance of 34.47 million common shares to Lehman.

In addition, Equity Residential will be responsible for $5.5 billion of consolidated and unconsolidated secured debt, exclusive of a roughly $300 million mark-to-market adjustment, including $5.1 billion of Fannie Mae and Freddie Mac secured debt for which consent to assume has already been obtained.

Equity Residential said it also obtained a commitment from Morgan Stanley Senior Funding, Inc. to provide a $2.5 billion bridge loan facility.

Also, Equity Residential said it plans to fund a substantial portion of the acquisition with proceeds from asset sales. Specifically, Equity Residential intends to use proceeds from $3 billion to $4 billion in asset sales in exit markets such as Atlanta, Orlando, Phoenix and Jacksonville, Tenn., and from the sale of non-core assets in other markets between now and the end of 2013.

Other expected sources of capital to fund the transaction include cash on hand, available borrowings under Equity Residential's $1.75 billion revolving credit facility, issuances of common shares and debt financing, including potential new term loans or issuances of unsecured debt.

In a separate news release, AvalonBay said it obtained a commitment from Goldman Sachs Lending Partners LLC to provide a $2.2 billion bridge loan facility, which has been sized appropriately in case additional lender consents are not received.

Equity Residential said specified Archstone assets will be placed in a joint venture co-owned by Equity Residential and AvalonBay. Equity Residential will maintain a 60% interest and AvalonBay will maintain a 40% interest in the joint venture.

Shareholder agreement

According to the Equity Residential release, Lehman entered into registration rights and shareholder agreements with Equity Residential under which all shares issued to Lehman will have a lock up period of 150 days.

In addition to other restrictions, as long as Lehman owns more than 5% of Equity Residential's outstanding shares, Lehman will vote its shares in accordance with the recommendations of Equity Residential's board of trustees, subject to specified exceptions.

Termination payment

If the purchase agreement is terminated by Lehman as a result of Equity Residential and AvalonBay's failure to satisfy the closing conditions, Equity Residential and AvalonBay will be jointly and severally liable to pay $650 million in liquidated damages to Archstone.

Equity Residential said this amount will be increased to $800 million if it and AvalonBay extend the closing date beyond 60 days following the date of the purchase agreement.

Equity Residential said the transaction is expected to close in the first quarter of 2013.

New York-based Lehman Brothers Holdings Inc. was the fourth-largest investment bank in the United States. The company emerged from bankruptcy on March 6, 2012.

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