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DDR going to $10+ now that debt problem is no longer an issue

February 24, 2009 – Comments (4) | RELATED TICKERS: DDR

The company has been profitable thru-out this downturn. Its only problem was the debt squeeze on cash. Now that has been solved for the near-term.

Struggling shopping-center giant Developers Diversified Realty Corp. plans to sell a 20% stake to Germany's Otto family in a $112.5 million deal that would give one of Europe's major retail players its biggest presence so far in the U.S. market.

The Otto family, which owns scores of malls in Central and Eastern Europe as well as such retailers as the Crate & Barrel chain, would buy 30 million shares, half at $3.50 a share and the other half at $4 a share. The family also would receive warrants to purchase another 10 million shares at $6 apiece and would provide the company another $60 million through a loan.

If the family buys all 40 million shares, the purchases would make it Developers Diversified's largest shareholder, with a stake of nearly 30%. Developers Diversified's stock closed at $2.50, down 13 cents, or 4.9%, in 4 p.m. composite trading on the New York Stock Exchange Monday. The stock has declined by nearly 94% from its year-ago close.

For Developers Diversified, the owner and manager of 710 shopping centers, the deal represents a lifeline to help it retire debt coming due next year amid depressed capital and retail markets. Proceeds from the deal will help Developers Diversified eliminate some of its $500 million in unsecured debt coming due next year through buying it on the open market at less than face value. Developers Diversified executives defended the deal on a conference call with investors Monday as a good one for the company, even though the stock traded above $30 as recently as last October.

"A lot of companies that think it's going to get better are mistaken," Chairman and Chief Executive Officer Scott Wolstein said of the capital markets. "We are in an unprecedented financial crisis."

For the Otto family, the investment is a bet that U.S. discount and big-box retailers -- the type that populate most of Developers Diversified's centers -- will withstand the recession better than other retailers. The investment is a bold one because portions of the big-box industry have suffered from curtailed spending in this recession, with Linens n' Things Inc., Circuit City Stores Inc. and Mervyn's LLC opting to liquidate in bankruptcy court in recent months. The occupancy of Developers Diversified's 710 centers tumbled to 92% in the fourth quarter from 96% a year ago.

"I believe that the discount-retailing sector will be stable and weather these difficult times quite well," Alexander Otto, the Otto family's 41-year-old scion, noted in an interview.

Under the deal, the Otto family would appoint two directors to Developers Diversified's board. Developers Diversified intends to host a meeting in April for its shareholders to vote on the deal.

Write to Kris Hudson at kris.hudson@wsj.com