UPDATE: Berggruen, Highstreet Spar Over Karstadt Equity Stake

Billionaire investor Nicolas Berggruen has offered Karstadt property owner Highstreet an equity stake in Karstadt's performance in exchange for an agreement to lower rents and a further cash investment in Karstadt, people familiar with the matter told Dow Jones Newswires.

Highstreet has thus far scoffed at the deal, which it rejects on grounds that Berggruen's proposal unfairly rewards the stores' acquirer with a disproportionate share of Karstadt's return on equity relative to both parties' cash investments, one person said.

The tense negotiations highlight ongoing uncertainty about the fate of Karstadt, which risks a breakup if Berggruen and Highstreet aren't able to reach an agreement by mid-July.

Highstreet is further skeptical of Berggruen's proposal to amend Karstadt's master lease agreement, which would give him the freedom to separate some Karstadt segments, such as sporting goods and premium goods, into individual units, the person said.

The amendment would let Berggruen more effectively pursue sales and merchandising agreements with external business partners who otherwise wouldn't be interested in investing in mixed-use stores, one of the people said.

Berggruen remains committed to keeping Karstadt intact, however, and won't try to sell or spin off any of the stores, one of the people said.

Berggruen's plan would require Highstreet to contribute EUR30 million for Karstadt in exchange for a 10% slice of the company's return on equity.

Berggruen, who has agreed to invest EUR70 million up front, would maintain the remaining 90% of Karstadt's return on equity. Furthermore, Highstreet would acquire the 10% equity--in the form of warrants--only after Berggruen had recouped his initial investment twice over, according to two people familiar with the matter.

Berggruen's EUR70 million investment would consist of an EUR65 million purchase price and EUR5 million in additional intellectual capital rights.

The Highstreet real estate consortium, led by Goldman Sachs Group Inc. (GS), acquired the bulk of Karstadt properties in a leaseback deal several years ago from Karstadt's former owners. Critics argue that Highstreet has charged exorbitant rents that contributed to Karstadt's demise, and Berggruen wants new lease terms to help improve profitability.

Berggruen and Highstreet have already agreed to lower Karstadt rents immediately to around EUR210 million a year, two people said. The debate on rents is now focused on Highstreet's desire to increase rental prices relatively quickly in subsequent years, which Berggruen wants to permit only based on Karstadt's revenue performance.

As of Friday evening, Berggruen hadn't received a response from Highstreet regarding further talks, people said.

Berggruen won a months-long bidding process to acquire Karstadt earlier this month, beating out Highstreet and another buyout fund, Triton.

Karstadt was forced into an insolvency process and auction after its parent company Arcandor AG (ARO.XE) last year failed to line up a government bailout to stay afloat.

-By William Launder; Dow Jones Newswires; [phone]; [e-mail]