The Real Deal New York

Forest City changing up board, won’t pursue sale (for now)

Ratner family is further losing control of board
By Kathryn Brenzel | March 22, 2018 08:11PM

Bruce Flatt and “The Rejected Suitor” by Francis W. Edmonds

Forest City Realty won’t be going through with a sale after all, despite initially attracting more than 50 potential buyers, the real estate investment trust announced on Wednesday.

Instead, the company is shifting control of its board further away from the Ratner family. Hedge funds Starboard Value and Scopia Capital Management, which respectively own 3 and 8.3 percent of the REIT’s outstanding shares, will each be permitted to appoint an additional director to the company’s board, while the Ratner family will be limited to two members instead of four. One of those members will need to be independent from the family. James Ratner will also give up his chairman position when the board elects a new chairman.

Last month, Bloomberg reported that Brookfield Asset Management was in talks to buy Forest City, offering somewhere in the ballpark of $6.4 billion, or $23.95 per share. The REIT wouldn’t comment on the potential deal, but set a deadline — March 21 — for the end of its “strategic review” to mull whether a sale was the route to go. Forest City extended that deadline to March 28 on Wednesday, then announced late on Thursday that the review had concluded.

Representatives for Brookfield declined to comment on Wednesday and didn’t respond to requests for comment on Thursday. Forest City’s announcement doesn’t name any of the interested buyers but stated negotiations came down to two companies, including a “large financial investor with a strong track record of executing large, complex real estate and corporate transactions.”

Only six of the 50 initially interested buyers made it to the second round of bidding. Though the “financial investor” and Forest City entered an exclusivity agreement and discussed a $26 per share selling price, the potential buyer came back with a $24.50 per share offer on March 7, which the REIT rejected. Forest City then proposed $25.50 per share, while the investor put forward a $25 per share offer on March 13. The deal ultimately seemed to hinge on the buyer wanting certain joint venture partners to agree to a change of control prior to striking a deal, a condition that Forest City wouldn’t abide. It’s not clear exactly what joint ventures or third parties the investors were focused on, nor what the potential agreements with the partners would look like.

“The board concluded that stockholder value would be better enhanced on a standalone basis and that the conditional requirements specified by the counter party in the March 13 proposal created more uncertainty around a potential transaction than the board was prepared to accept,” James Ratner and Scott Cowen, lead independent director stated in a letter to shareholders on Thursday.

This has already been a year of major changes for Forest City. In January, MaryAnne Gilmartin stepped down as CEO of Forest City New York to form her own development company, L&L MAG. Around the same time, Forest City announced that it was selling nearly all of its remaining stake in Pacific Park, bringing Greenland USA’s interest in the mega-development up to 95 percent. The REIT also laid off roughly 20 staffers in its Brooklyn office, marking the third round of layoffs since early 2016.

The changes were all part of a larger shift in Forest City’s strategy since becoming a REIT in January 2016. The company has largely focused on cutting back its exposure to ground-up development and consolidating its portfolio.

In December 2016, cousins Bruce and Charles Ratner stepped down from the company’s board. The REIT also moved away from a dual-share structure that gave the Ratner family voting control. In April of last year, an activist investor called on the REIT to consider a sale of the company. By September, Forest City acknowledged that it was mulling “a broad range of alternatives to enhance stockholder value,” which included a possible merger or sale.