Equity Residential late Friday announced that it entered into a contract to acquire an approximate 26.5 percent ownership interest in Archstone, a privately-held owner, operator and developer of multifamily apartment properties, for $1.325 billion in cash.

The ownership interests under contract represent 50 percent of the collective interests currently owned by affiliates of Bank of America and Barclays Bank PLC. The remaining 47 percent interest in Archstone is controlled by Lehman Brothers Holding Inc.

Closing is contingent on the remaining significant Archstone owner not exercising its right of first offer to acquire this interest from the Sellers at the same price as agreed to by Equity Residential, as well as certain other closing conditions. If this owner declines to exercise its right and all other closing conditions are met, it is expected that the acquisition by Equity Residential would occur late in the first quarter of 2012.

Equity Residential is the fifth largest owner and managers of apartments while Archstone is the 11th largest owner and eighth largest managers, according to the NMHC 50 list. In May 2007, Archstone, then the country's largest publicly traded apartment REIT, was acquired by a partnership of Tishman Speyer Properties and Lehman Brothers in a $22.2 billion deal.

However, Equity Residential may face competition before the deal closes. According to a Financial Times, report, the estate of Lehman Brothers Holdings Inc. is trying to raise money for a possible counterbid to Equity Residential’s offer. According to the report, Lehman has been in discussions with investors including Blackstone Group LP and Brookfield Asset Management Inc. to arrange financing.

If the deal goes through, Equity Residential will hold a minority interest and will not have the ability to cause any decisions or actions with respect to Archstone. Equity Residential will, however, have approval rights over certain major decisions including annual budgets and certain financings, refinancings, acquisitions and dispositions. At this time, Equity Residential has no rights or contractual obligations to acquire more than a 26.5 percent interest in Archstone.

The Archstone portfolio is comprised of apartment properties primarily located in top U.S. growth markets. As of September 30, 2011, the Archstone portfolio included 48,922 wholly-owned and stabilized apartment units as well as 1,332 apartment units under construction, land sites for the potential development of 5,279 apartment units and 9,423 apartment units owned in unconsolidated joint ventures with third parties. The portfolio also includes approximately 14,000 wholly-owned or unconsolidated joint venture-owned apartment units in Germany. The purchase price equates to approximately $296,000 per unit and a capitalization rate of 5.3 percent for Archstone’s wholly-owned and stabilized portfolio.

“The Archstone and Equity Residential portfolios are highly complementary with concentrations in the same markets and assets of similar quality,” Equity Residential’s President and CEO David J. Neithercut said in a statement. “In addition, since we believe that none of the current owners of Archstone is likely to be a long term owner, acquiring this position allows us a role in determining, and perhaps even expediting, the ultimate outcome regarding Archstone.”

The consummation of the acquisition is not subject to a financing condition. Equity Residential expects to fund the acquisition through a combination of cash on hand, available borrowings under its $1.25 billion revolving credit facility (which the company has the contractual right under certain conditions to increase to a total of $1.75 billion), proceeds from the disposition of non-core apartment assets, bank term debt and secured and unsecured debt and equity offerings. Contemporaneously with entering into the contract with the Sellers, Equity Residential also obtained a commitment from Morgan Stanley Senior Funding, Inc. to provide a $1.0 billion bridge loan facility.

For the fourth quarter of 2011, Equity Residential will record approximately $5.8 million of transaction and financing expenses from this acquisition, which will impact the company’s earnings per share and funds from operations.

Morgan Stanley & Co. LLC served as Equity Residential’s financial advisor and Hogan Lovells as its legal advisor on this transaction. BofA Merrill Lynch and Barclays Capital served as sell-side financial advisors on this transaction. Kaye Scholer served as legal advisor to Bank of America and Simpson Thacher & Bartlett served as legal advisor to Barclays Bank PLC.