What Happened with Forest City’s Potential Sale?

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After nearly six months, Forest City Realty Trust Inc. announced that it has ended its strategic review process—and it did not result in a sale of the company.

Instead, the Cleveland-based REIT, which had been facing activist pressure to boost shareholder value, reconstituted its board to increase the number of independent directors and reduce the influence of the Ratner family. Nine directors resigned and James Ratner, former board chairman, was named interim chairman until a substitute will be selected. The company’s former controlling shareholder RMS agreed to change its director nomination rights to two designees from four Ratner family members.

“The board, I think, feels pressure and wanted to respond in some way by increasing representation of those activists and truly independent directors,” says Paul Adornato, a veteran REIT analyst.

The move buys Forest City more time, Adornato adds. “I think that now it comes down to performance,” he says. “That is, if they’re unable to reach their goals in terms of profitability and efficiency that they’ve laid out, then there are fewer barriers to a takeover given that the board is more independent.”

In a note published shortly before the announcement, Evercore ISI analysts wrote that they believed “that Forest City is more likely to remain a publicly-traded entity at this time and not be sold.” Without a “godfather offer”—one that cannot be refused—the REIT’s board could instead decide to stay the course and try again in the future. The analysts also noted that in roughly two-and-a-half years, Forest City will not be subject to frictional costs related to the built-in gains tax on asset sales. Forest City recently converted to a REIT and is subject to this gains tax until the end of 2020. After nearly three years, there should also be more clarity on the company’s development pipeline, the analysts wrote.

In September, Forest City announced it would consider a range of actions, including a sale or a merger, as part of its strategic review process. The firm, known for its Pacific Park multifamily project in Brooklyn and the New York Times building in Manhattan, had faced pressure from activist investor Jonathan Litt, of Land & Buildings Investment Management, who said, roughly a year ago, that Forest City would attract a lot of bidders if it went up for sale.

Indeed, Forest City did have a lot of bidders, James Ratner and Scott Cowen, lead independent director, stated in a letter to shareholders.

At the start of the review process, Forest City drew in 50 potential interested buyers. Forest City’s board whittled that pool to one unnamed party—a “large financial investor with a strong track record of executing large, complex real estate and corporate transactions”—who submitted a proposal earlier this month. After some back and forth, the final offer called for a transaction valued at $25 per share in cash, as long as future dividend payments were stopped and there would be a closer look at the projects where third-party consents might be needed to change control. Forest City asked the buyer to eliminate the third-party consent condition, but the buyer refused.

“The board concluded that stockholder value would be better enhanced on a stand-alone basis and that the conditional requirements specified by the counterparty in the March 13 proposal created more uncertainty around a potential transaction than the board was prepared to accept,” according to Forest City’s letter.

Earlier this year, Bloomberg reported that Brookfield Asset Management Inc., a Toronto-based alternative asset manager, was in talks to acquire Forest City. However, some observers at the time said it would be unlikely that Forest City would go through with such an acquisition, as it was said that the offer price was not much higher than Forest City’s stock price.

The market price of the REIT’s common stock has been trading lower than the company’s value, according to the board’s letter, so the board also authorized increasing its share repurchasing program to a total of $400 million from $100 million.

As of Jan. 5, Forest City stock was trading at a discount of 16.63 percent, according to S&P Global Market Intelligence’s most recent consensus NAV estimate. Meanwhile, the SNL U.S. Equity REIT Index was trading at a median discount of 5.1 percent.

Forest City’s stock price on Friday afternoon was $19.92 per share, down from its previous close of $21.27 per share.

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