American Financial bought for $1.1 billion in cash and stock

American Financial Realty Trust of Jenkintown, which strived to become the preferred landlord of leading banks and other financial institutions, announced today that it was being bought for $1.1 billion in cash and stock by Gramercy Capital Corp., a New York commercial real estate finance company.

Gramercy also agreed to assume $2.3 billion of American Financial's debt.

Under terms of the merger agreement, Gramercy will acquire all of American Financial's common stock for $5.50 a share, plus 0.12096 shares of Gramercy common stock.

The ratio means that American Financial shareholders will own about 31 percent of Gramercy's outstanding shares.

Lewis Ranieri, chairman of American Financial, said the sale was timely given that tight credit markets would have constrained his company's second restructuring phase and other growth opportunities. American Financial reportedly had been in play since August 2006, according to some analysts.

Matters were complicated by the unexpected death of its chief executive officer, Harold Pote. He had been leading a company repositioning, and died in June while on vacation.

"This was the best thing for us to do," Ranieri said today in a conference call. The company could stay independent, "but how long would it take to . . . put ourselves back into the position to get the additional debt to grow the company?"

Christopher Haley, managing director of Wachovia Securities Inc., who specializes in real estate securities research, said the deal was a good strategic move for American Financial.

The firm will be able to reposition its portfolio faster and "under a more stable umbrella" than it could alone, he said.

The deal was approved by the boards of both companies, and is expected to close by the end of the first quarter of 2008.

American Financial, formed in 2002, is a landlord to, among others, Bank of America N.A. and Wachovia N.A., two of the nation's five largest banks.

Gramercy is externally managed by GKK Manager L.L.C., a majority-owned subsidiary of SL Green Realty Corp., New York City's largest office-property owner, which includes among its tenants Citigroup N.A. and Morgan Stanley.

"We believe that this major strategic acquisition will provide a powerful growth engine for the future," Marc Holliday, chief executive of Gramercy, said in a statement today. "In a single stroke, it will make the company a leading player in commercial real estate ownership, and further differentiate us from our current peers."

After the transaction, Gramercy expects to own about 27 million square feet of commercial real estate in 37 states.

Some say the sale of American Financial, which had an initial public stock offering in mid-2003, was not surprising. The company began to grow aggressively from 2004 and 2005 by acquiring assets beyond bank branches.

"What became a challenge was the amount of leverage it was carrying and the slight change in strategy the company affected," Haley said.

He said the strategic misdirection and lessened investor confidence started in 2005 and carried through to 2006, resulting in the removal of the prior management team during the third quarter of 2006.

Mitchell Germain, an analyst at Banc of America Securities, said the deal's price was 30 percent below where American Financial was trading a few months ago, a sign of a change in the market for private deals. Banc of America Securities L.L.C. was financial adviser to American Financial in the deal.

"We believe the company faced few other options. . . . With the plan nearing completion, growth continued to lag," he wrote in a note to investors.

American Financial shares closed up $1.56 today at $8.01 on the New York Stock Exchange. Gramercy shares gained 3 cents to close at $24.25.