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Famous building houses office of the Chicago Teachers Union... Merchandise Mart up for sale for more than $1 billion, says Crain's Chicago Business

Crain's Chicago Business reported on line over the Labor Day weekend that Chicago's Merchandise Mart, which houses the offices of the Chicago Teachers Union via a long-term lease, is for sale for the asking price of more than $1 billion. The Mart, which has been owned by the Kennedy family since 1945, is one of the largest commercial properties in the USA. The Merchandise Mart is not the only property in "Merchandise Mart Properties", although it is by far the largest and most famous.

The Crain's article, published on line over Labor Day weekend, follows:

For more than $1 billion, you can buy Christopher Kennedy's Merchandise Mart Properties Inc.

Parent company Vornado Realty Trust has been dropping hints along Wall Street and with potential buyers that it wants to sell the subsidiary, including the fortress-like structure along the Chicago River. The New York real estate investment trust purchased it from the Kennedy family in 1998 for $630 million.

Vornado's efforts already have yielded a $1.25-billion offer, but that deal died last month, people familiar with the negotiations say.

A sale could portend big changes for Mr. Kennedy, 47, who as Mart president since 2000 has led a major expansion of the business, which stages trade shows and leases showroom and office space in eight buildings nationwide. The Mart's management team is likely to be a key part of any deal.

Vornado executives are expected to continue to troll for a buyer for the Mart, which has been battered by recession and tenant defections and doesn't fit with the REIT's core business of owning office and retail properties in New York and Washington, D.C., analysts say.

“The Mart division has been identified by management as an asset best owned and operated by someone else,” says John Guinee, an analyst at Baltimore-based Stifel Nicolaus & Co.

Mr. Kennedy declines to comment on whether the REIT wants to sell off the Mart but says Vornado's management “will look at yield above everything else, and if they can reinvest at a higher yield, they will. Always.”

The Kennedys have been associated with the 3.5-million-square-foot Merchandise Mart since 1945, when patriarch Joseph Kennedy paid $12.5 million for the architectural gem. Under Christopher Kennedy's management, the Mart has expanded from four buildings in two markets to eight buildings in six markets totaling nearly 8.9 million square feet.

The Mart acquisition, along with the 1997 purchase of a stake in a cold-storage company, helped solidify Vornado Chairman Steven Roth's reputation as an unorthodox real estate investor. He's also acquired short-term stakes in public companies, such as local giants McDonald's Corp. and Sears Holdings Corp. The REIT still owns a nearly 33% stake in New Jersey-based Toys ‘R' Us Inc., acquired in 2005.

Even before the recession, analysts and institutional investors complained that Vornado had become too complex, hurting the stock price. Two years ago, after selling off its cold-storage business, Mr. Roth publicly pledged to “simplify and prune” the REIT.

Cohen Bros. Realty Corp., a New York-based firm that operates four home design centers nationwide, was ready to assist in that process, offering $1.25 billion this summer for most of the Mart's assets, sources say. It's unclear why a deal couldn't be reached. Company CEO Charles Cohen did not return calls requesting comment.

The pool of other potential buyers is likely to be small because of the size of the Merchandise Mart and the uniqueness of the showroom business.

The Mart division has struggled over the last eight quarters, recording a cumulative loss of $12.8 million, earning the distinction of being the REIT's worst-performing business segment. The Mart's EBITDA, or earnings before interest, taxes, depreciation and amortization, plunged nearly 14%, to about $100.5 million, in 2009, down from $116.4 million in 2008.

In March, a Mart affiliate defaulted on a $218-million mortgage on a showroom complex in High Point, N.C., after the property failed to generate enough cash to cover the payments. Mart executives are in talks to restructure the debt.

“This is a business that public investors won't sufficiently appreciate during good times, so I think that the Vornado story, at the end of the day, would probably be better off without it,” says analyst Michael Knott, of Newport Beach, Calif.-based real estate research firm Green Street Advisors Inc.

Vornado executives decline to comment, a spokeswoman says.

But Mr. Kennedy says the Mart has been a very good long-term investment for Vornado shareholders. A turnaround in performance is already under way, he says, citing several new lease deals that have not yet taken effect.

Mr. Kennedy also is looking to snare more government work, like the management of a new $425-million medical mart and convention center in Cleveland scheduled to open in 2013.

He also says he'd be interested in taking over management of McCormick Place. If Mart executives could come up with a creative plan for the South Side convention center, “we'd love to do that.”

Whatever his plans for expanding the Mart unit, Mr. Kennedy says he has no interest in leading a buyout of it.

“The business is in very good hands with Vornado,” he says. “The balance sheet, which has access to billions of dollars of cash, gives us an enormous competitive advantage.”



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