A New Jersey real estate company, in a deal valued at $638 million, has acquired Prime Retail Inc., the troubled Baltimore company that is the nation's second-largest operator of outlet malls.
Under the agreement, Lightstone Group LLC, which operates 19.3 million square feet of commercial space in 26 states and Puerto Rico, assumes $523 million of Prime Retail's debt and will pay shareholders $115.5 million.
The company now becomes privately held by Lightstone. Prime Retail's headquarters and management team will remain in Baltimore, officials said.
"I think with Lightstone's capital, our position has improved considerably," said Glenn D. Reschke, Prime Retail's chief executive and chairman. "Along with the closing, they've restructured our balance sheet by refinancing nearly half our debt."
The infusion of capital will allow Prime Retail to rehabilitate its malls, improve its financial footing and expand into other forms of retail, he said.
David W. Lichtenstein, president and chief executive officer of privately held Lightstone, was one of Prime's largest shareholders before the acquisition. He said Prime Retail was fragmented in the past by too many classes of shareholders and large amounts of debt, up to $1.2 billion in 2000.
"They had too many warring shareholders," Lichtenstein said. "They had a lot of debt on the company that was suffocating them. It was like a perfect storm with a lot of bad things happening to them."
But Lichtenstein said that Prime Retail's portfolio has well-positioned properties.
"I think a lot of the underlying real estate is good real estate and I'm betting with my own wallet that I'm right," he said.
Two shareholders opposed the acquisition when it was first announced last summer, saying that preferred shareholders who hold Class A stock would be paid too little at $16.25 a share.
The dissenters, Merrill Lynch & Co. Inc. and Fortress Investment Trust II of New York, at the time together owned nearly one-third of Prime Retail's preferred stock.
The final deal raised the Class A stock to $18.40 a share.
Merrill Lynch didn't return calls regarding the deal yesterday.
Fortress Investment Trust couldn't be reached for comment.
Reschke said the company couldn't discuss individual shareholder votes.
Prime owns 23 centers, including outlets in Hagerstown, Queenstown and Perryville in Maryland. It has struggled with debt, lower sales and empty stores in recent years. The New York Stock Exchange de-listed its stock as it veered near bankruptcy.
As part of a turnaround strategy during the past three years, the company has been selling shopping centers and refinancing mortgages to pay down debt. Reschke said the company has only a couple of malls on the market and will focus on improving existing malls by adding more "entertainment" options, such as cinemas and eateries.
"Traditionally, we always had these food courts, but we're trying more and more to bring sit-down restaurants, like Ruby Tuesday," Reschke said.
Analysts said the outlet mall industry is overbuilt, prompting many centers to redefine themselves. The largest outlet mall operator is Chelsea Property Group Inc. of Roseland, N.J., with 58 properties.
"It's gotten to the point of saturation, although [outlet malls] do well in some markets such as those in tourist destinations," said Thomas H. Maddux, president of the commercial real estate firm KLNB Inc.