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Duane Morris, Baker Hostetler Work Out $6.2 Bil. Deal

By Gina Passarella
October 30, 2006
The Legal Intelligencer

Deal Makers

When Duane Morris Chicago corporate partner David J. Kaufman helped put together a $6.2 billion merger that would have his client, Inland Retail Real Estate Trust, taken under the leadership of Developers Diversified, he figured the chances of working for Developers Diversified were unlikely.

Fortunately though for Kaufman, Inland Retail has several related businesses - some larger than Inland Retail - that could continue to keep him busy.

Over the past few years, Kaufman had handled some stock offerings on behalf of Inland Retail, a operator and developer of community centers, and completed a $200 million internalization transaction for the company in which it bought the property management affiliates that staffed its stores.

In its original prospectus, Inland Retail told its shareholders that within six to eight years it would review its options and either sell the company, list and trade its stock or continue with the status quo, Kaufman said.

That review of its liquidity started about eight or nine months ago, and Kaufman said it was eventually the company's financial adviser, Bank of America, that convinced the board that now was a good time to sell given the current real estate market.

Kaufman said Inland Retail put together a "narrow auction" considering there are only a few companies who could afford a $6 billion purchase.

The hardest challenge for Kaufman, he said, was distancing himself and his client from one of the bidders, another Inland company.

Inland Real Estate Corp. also took part in the auction, and Kaufman said procedures needed to be created to make sure the company didn't use its relationship with Inland Retail to its advantage.

Developers Diversified ultimately won the bid, and it was just a "couple of very long days" in between the final bids and the signing of the agreement, Kaufman said.

"Getting to the signing gets you 40 percent done," he said, adding that the deal is expected to close by the end of the first quarter of 2007. The agreement was signed on Oct. 20.

As part of the merger agreement, Developers Diversified retains the possibility of selling some of its newly acquired assets at the time of closing, Kaufman said.

Inland Retail shareholders have to vote to approve the merger and Kaufman said he would be working on preparing the proxy statement.

Developers Diversified has partnered with an investment company in this transaction, and Kaufman said he expects to work with them on a more frequent basis as the deal nears closing.

To put the deal together, Duane Morris used attorneys from its Houston, Los Angeles, Philadelphia and Chicago offices in the practice areas of real estate, environmental law, employee benefits and tax, he said. This was the largest deal in Duane Morris' history.

Assisting Kaufman from the Chicago office were partner Michael A. Witt and associates Nicholas O. Isaacson and Dietrich A. Loos.

Chicago-based Baker & Hostetler represented Developers Diversified under the leadership of Cleveland partners Ronald A. Stepanovic and Matthew D. Graban. They were unavailable for comment at the time of publication.

Deal Details

Under the terms of the agreement, Developers Diversified will acquire all of the outstanding shares of Inland Retail for a cash price of $14 per share. Developers Diversified may elect to issue up to $4 per share of the total merger consideration in the form of Developers Diversified common stock.

The transaction has a total enterprise value of approximately $6.2 billion. This amount includes approximately $2.3 billion of existing debt, a significant portion of which is expected to be prepaid at closing. Inland Retail's real estate portfolio aggregates 307 community centers, neighborhood shopping centers and single tenant/net leased retail properties, comprising 43.6 million square feet of total gross leaseable area.

Developers Diversified has reached agreement with a major U.S. institutional investor on a joint venture, which will acquire 67 of Inland Retail's community center assets for approximately $3 billion of total asset value. The joint venture will be leveraged up to 60 percent loan to value, and Developers Diversified will contribute 15 percent of the equity.

Developers Diversified will also earn a promoted interest equal to 20 percent of the cash flow of the joint venture after the partners have received an internal rate of return equal to 10 percent on their equity investment. Additionally, Developers Diversified has received financing commitments totaling in excess of $3 billion, which it may use to fund all or a portion of the total merger consideration.

Inland Retail's properties are leased at 95 percent occupancy. Its portfolio is made up of 116 community centers, 97 neighborhood shopping centers, 91 single-tenant assets and three lifestyle, hybrid assets. About 70 percent of the assets are located throughout Georgia, Florida, North Carolina, South Carolina and Virginia. The top five tenants in these facilities are Target, Wal-Mart, Publix, Lowe's Home Improvement and Kroger.

Developers Diversified will also be acquiring a pipeline of five projects and other potential expansion and redevelopment projects.

Following the merger, Developers Diversified will own or manage more than 800 shopping centers in 45 states, plus Puerto Rico and Brazil, comprising 162 million square feet.

This article originally appeared in The Legal Intelligencer and is republished here with permission from law.com.