A man speaks on his mobile phone across from The New York Times headquarters building on April 21, 2011 in New York City.Ramin Talaie
Shareholders of Forest City Realty Trust Inc. voted Thursday to sell their company to Brookfield Asset Management Inc., a matter which should have been routine.
It was not, however. Unusual for such big-ticket mergers, the board of Forest City was divided on the US$6.8-billion sale, with the deal moving forward only when the chief executive of the company switched sides after a 6-6 tie.
And Albert Ratner, a member of the family that founded the company nearly 100 years ago, filed suit Monday night, seeking to block Thursday’s shareholder vote on the deal. Mr. Ratner, who failed to stop the vote when his suit was rejected by a judge, feels Brookfield is walking off with the company on the cheap.
Yet, Forest City’s wide-open auction, created at the behest of two activist investors, ran for months and featured multiple initial bidders who all placed similar values on Forest City. In the end, Brookfield was the only one willing to absorb complicated, tax-challenged Forest City.
Cleveland-based Forest City isn’t neatly pigeonholed: It has office buildings, apartments, and retail space, as well as land and other projects still under development. A fair number of its properties were recently acquired, and under U.S. tax law, couldn’t be sold off piecemeal without triggering significant tax payments. Forest City counts nine major American metro areas, including New York, Washington and Boston, among its core markets, and owns properties such as the New York Times building and offices near Massachusetts Institute of Technology.
All of that worked against Forest City. In its proxy to shareholders justifying the Brookfield deal, Forest City says it has long traded at a discount to other real estate companies and to its own estimates of its net asset value (NAV), the value of its assets minus its obligations.
The shares had topped US$70 in 2007, prior to the financial crisis, fell as low as US$3.26, and were in the mid-teens when activist investor Scopia Capital Management LP revealed its stake in June, 2016. It was later joined by Starboard Value LP. The two prodded for changes, and Forest City converted into a REIT, or real estate investment trust, which pays no corporate-level income tax, and made governance changes to limit Ratner family control.
By the summer of 2017, the valuation gap persisted, however, and the Forest City board started a strategic review. By fall, the company had contacted 44 potential buyers, with 19 signing confidentiality agreements. By October, five cash bidders, including Brookfield, emerged. All suggested they’d pay anywhere from US$24.50 to US$27 a share for the company.
That was only the beginning of nine more months of negotiations and deliberations, which also included new Forest City board members suggested by the activists. Ultimately, Forest City was left haggling only with Brookfield over various terms and conditions, including a price that ended up at US$25.35 a share. Brookfield will assume more than US$3-billion in Forest City debt, bringing the total deal value to roughly US$10-billion.
Less than six weeks before the deal closed, Forest City’s 12-member board was evenly split on the merits of a Brookfield deal, with CEO David LaRue among the dissenters. The naysayers argued that Forest City’s NAV was higher than the Brookfield offer and that, if the company waited long enough to sell assets, it could avoid tax problems. Management told the board, in one example, that an asset-by-asset valuation of the pieces of the company yielded US$33.01 a share, a 32-per-cent premium to Brookfield’s offer.
The directors who won the argument, however, expressed concern that with time comes risk, and there was no assurance that Forest City’s properties would yield the cash flows management projected. And, they emphasized that they’d effectively put the company up for auction – and were left with just Brookfield as a buyer. Valuation estimates using metrics other than NAV found the Brookfield offer appropriate. Mr. LaRue, the CEO, switched over to the yea side, while James Ratner, the company’s chairman and a member of the founding family, did not.
Albert Ratner, the 90-year-old former CEO of Forest City, took his case against Brookfield public, calling it a “fire sale price.” But Thursday, 83 per cent of shareholders approved the deal, with many Ratner shares presumed to be among the dissenters. The deal seems headed to completion early in December.
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