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Key member of founding Ratner family opposes Forest City's acquisition by Brookfield

The pending Brookfield absorption of Forest City Realty Trust--subject of a contentious FCRT board debate and now a FCRT shareholder vote by Nov. 15--has hit a small bump, with a former company leader arguing that the board's 7-5 acceptance of the deal sells the company way too cheap.

In a press statement (also bottom) yesterday, first published in the Wall Street Journal, Albert Ratner, co-Chairman Emeritus and Former CEO (from 1975 to 1995), urged fellow shareholders to vote against the acquisition. Part of the founding Ratner family that has recently seen its power severely diminished, the 90-year-old Al Ratner controls about 1% of the shares.

His cousin, current Chairman James Ratner, owns 2.46% of the shares and has also indicated his intention to vote against the plan. The plans of other family members--who once collectively controlled the company as owners of now-defunct Class B stock--remain unclear. (The total percentage held by family members remains unclear to me.)

Brookfield reached merger support agreements with two hedge funds, Starboard and Scopia, owning 5.63% and 8.15% respectively, along with the Forest City board agreement. Al Ratner's letter seems aimed at major stockholders like Vanguard Group and Vanguard Investments Australia, which together hold more than 20% of the stock and may have a longer-term perspective than that of the hedge funds.

Making the case

In his letter, Ratner criticized not just the price but also the timing, suggesting it resulted from a flawed process and that other tactics would result in "superior value opportunities available to Forest City shareholders."

"Forest City shareholders have only one question to decide: is it better to accept an effective $24.99 per share price from Brookfield now," he stated, "or maintain the ability to receive an estimated $46.03 per share (minus potential transaction costs) on an undiscounted basis – which is 84% more than the $24.99 effective price -- over the coming roughly 26 months?"

The "effective price" refers to the fact that Brookfield's offer of $25.35 per share comes with a suspended dividend.

Ratner took the most optimistic 2020 NAV (Net Asset Value) estimate in the proxy statement, while the board majority considered that unrealistic, and also warned of the impact of rising interest rates.

Still, he noted another sign of a questionable deal: Brookfield's offer represents the largest discount to analyst consensus compared with other real estate investment trust transactions in the past five years that were reviewed by the board.

Ratner noted that six of the seven directors voting in favor of proceeding with the transaction cast their vote just 66 days after having been named to the board--it was a deadlock--until the seventh director, CEO David LaRue, changed his vote from no to yes.

The new board was seated as a way to avoid a board challenge from activist investors, who believed Forest City's stock price significantly lagged the cumulative value of its assets. That followed a previous board shakeup, the collapse of the two-class share structure, and the decision to become a real estate investment trust, all aimed at appealing more to investors.

("I firmly believe that all 12 Forest City directors are quality people," Al Ratner wrote, avoiding the opportunity to cast LaRue as a Judas more interested in a golden parachute, as some commenters have hinted.)

Who's paying for it?

The proxy statement says that the merger will require approximately $6.97 billion, which will include debt financing up to $4.25 billion. Wrote Ratner:
Indeed, Forest City is such a high quality, low debt company that Brookfield is borrowing against Forest City's assets in order to finance a significant portion of the transaction. According to page 83 of the proxy statement, Brookfield has said it is financing the deal though a debt financing in an aggregate amount of up to $4.25 billion, or approximately 63% of the total purchase price
Unanswered questions

Ratner raised several questions:
  • Given the conclusions of the property-by-property FY2020 Net Asset Value analysis conducted by management, why were its contents not included in the proxy statement?
  • Why did the board apparently not obtain an independent Broker's Opinion of Value for FY2020 NAV, or for any other time period, or if the board did obtain such, why was it not disclosed?
  • If the board undertook an analysis or consideration of strategic alternatives that could deliver greater value to Forest City shareholders than the Brookfield transaction, why was no such analysis included in the proxy statement?
Such alternatives, he wrote, could include:
  • refinancing existing properties to take advantage of the company's unusually low indebtedness, and paying out a dividend to shareholders;
  • pre-marketing properties and contracting for their sales to close in January 2021, after the expiration of tax-related restrictions on sales stemming from the REIT conversion;
  • and/or comparing the values available from selling assets to a larger universe of logical buyers for each asset type, with the values available from limiting the pool of potential buyers only to those large enough to purchase the entire company.
Such alternatives would be available if the Brookfield transaction is rejected. The board majority, though, argued that they were unrealistic.

Then again, different factions may have different time horizons. As I wrote last month, the proxy statement--in what seems an understatement--acknowledges “a concern among certain directors that the competitive nature of the strategic process may have been dampened by perceptions that our Board was subject to pressure from certain of our stockholders to consummate a sale transaction.”

In other words, some board members contend, the hedge funds that pounced on an undervalued REIT got their way.

Albert Ratner, Co-Chairman Emeritus and Former CEO of Forest City Realty Trust, Urges Forest City Sharehold... by Norman Oder on Scribd