Two of Prime Retail Inc.'s larger preferred shareholders are opposing the terms of the planned $638 million sale of the Baltimore-based company, saying preferred shareholders would be paid too little.
Prime, the nation's second-largest owner of outlet malls, said yesterday that Merrill Lynch & Co. and Fortress Investment Trust II, which collectively own nearly one-third of the company's series A preferred stock, objected to the proposed payment of $16.25 a share to series A stockholders.
The potential buyer, Lightstone Group LLC, a New Jersey-based real estate company and Prime stockholder, agreed this month to buy the financially troubled company by assuming $523 million of Prime's debt and paying shareholders $115 million.
The $16.25 represents a 66 percent premium over the average closing price in June of Series A preferred shares. Lightstone also is offering 18 cents a share for common stock, a premium of 42 percent, and $8.66 a share to holders of series B stock, a 57 percent premium.
A spokesman for Prime said the company is pressing on with plans to present the offer to shareholders. The sale must be approved by two-thirds of series A and series B preferred shareholders and by a majority of common stockholders. Merrill Lynch owns 22 percent of outstanding series A stock, and Fortress owns about 10 percent of that class. Prime's common shares lost nearly 2 cents yesterday to close at 14 cents per share. Lightstone declined to disclose how many or what class of shares it controlled.
"We're taking this to the shareholders, and we'll let them decide," said Steve Sless, a Prime spokesman.
Michael Duvally, a spokesman for Merrill Lynch, was unable to comment on Prime's announcement. Fortress officials did not return phone calls yesterday.
Prime is still drafting a proxy, which must be approved by the Securities and Exchange Commission before being sent to shareholders in about eight weeks. Glenn D. Reschke, Prime's chairman and chief executive, has said that the sale would be a good deal for shareholders, tenants at Prime's 37 malls and for company employees, including more than 90 who work at Prime's downtown Baltimore headquarters.
David Fick, an analyst and managing director with Legg Mason Wood Walker Inc. of Baltimore, said he was not surprised by the two shareholders' objections because if the company is either sold or liquidated, Class A shareholders have a legal "liquidating preference" to get paid $25 a share before Class B or common shareholders are paid.
"The problem you get into, if you insist on all your rights in the senior securities, is you might end up not getting the deal done," he said, adding that often, "there's a balancing act that gives everyone something, and enough at each level that everyone grumbles and walks away and says they can live with this."
The offer by Lightstone "seemed to be to be an almost reasonable compromise, but not something they have a right to impose."
Prime said its agreement with Lightstone gives it the right to modify allocations to the various classes of shareholders but did not say whether that was being considered. The company plans to meet with representatives of Merrill Lynch and Fortress to discuss their opposition.
Prime, which owns and operates outlet malls in Hagerstown, Queenstown and Perryville, has struggled with heavy debt and lower sales and occupancy at its malls in recent years.