By Kris Hudson 
   Of THE WALL STREET JOURNAL

Developers Diversified Realty Corp. (DDR) plans to sell a 20% stake to German retail-property magnate Alexander Otto and his family for $112.5 million in a deal that would give the shopping center giant a much needed capital infusion.

The pact calls for Developers Diversified to sell 30 million shares to the Otto family, half at $3.50 a share and the other half at $4 a share. The family also will receive warrants to purchase another 10 million shares at $6 apiece. If the family buys all 40 million shares, the purchases would make it Developers Diversified's largest shareholder with a stake of nearly 30%. The family already held 6 million shares prior to the latest deal.

Developers Diversified's stock traded at $2.61 in mid-afternoon trading on the New York Stock Exchange. The stock has declined by 93% from its year-ago close.

(This story and related background material will be available on The Wall Street Journal Web site, WSJ.com.)

Developers Diversified intends to host a special meeting in April for its shareholders to vote on the deal. If the deal is approved, the Otto family will appoint two directors to Developers Diversified's board. Separately, an affiliate of the Otto family will provide Developers Diversified with a five-year, $60 million mortgage on several Developers Diversified properties. The company, based in Beachwood, Ohio, owns and manages more than 710 shopping centers, many of them housing big-box and discount retailers.

Otto and his family are major players in real estate in Europe and the U.S. They own ECE Projektmanagement of Germany, which manages 111 malls in Central and Eastern Europe and was founded by Otto's father, Werner Otto. Alexander Otto, the family's 41-year-old scion, also is the largest shareholder of Deutsche EuroShop AG, which owns 16 shopping centers in Central Europe. In the U.S., the family controls Paramount Group, a development and management company specializing in East Coast properties, including high-rise buildings in Washington, D.C. and Manhattan's 712 Fifth Ave. and 1633 Broadway. The family owns the Crate & Barrel chain of home furnishing and kitchenware stores.

"It's a very stable company," Otto said of Developers Diversified in an interview Monday. "I believe that the discount retailing sector will be stable and weather these difficult times quite well. We've known the management team for a long time and the company has a strong cash flow base."

Developers Diversified's deal with the Otto family comes two months after the U.S. company couldn't close on a deal to sell stakes in 13 shopping centers to an unidentified institutional partner for $890 million. People familiar with the talks identified the partner as DRA Advisors LLC, though Developers Diversified declined to confirm that and DRA didn't respond to inquiries about it.

Developers Diversified has for several months hunted for methods to raise capital for use in paying debt coming due this year and next. One of the company's joint ventures has a June due date on a $165 million debt, of which Developers Diversified's share is $35 million. But the bigger challenge comes in 2010, when Developers Diversified has $500 million of unsecured debt and a $1.25 billion credit line coming due.

Developers Diversified will use proceeds from the sale of shares to the Otto family to buy back its unsecured debt on the open market at less than face value, Chairman and Chief Executive Officer Scott Wolstein said. When asked whether he anticipates backlash from shareholders about the deal's dilution of their stakes, the CEO noted that the prices the Otto family will pay - $3.50 and $4 a share - are well above Developers Diversified's current price. The family is "paying a huge premium to the market," Wolstein said. "I don't know how shareholders can complain when they can buy the stock today at a lower price."

It wasn't long ago that the stock traded at the levels at which the Otto family will buy in; It last closed above $6 on Jan. 16, above $4 on Feb. 10 and above $3.50 on Feb. 12.

Also on Monday, Developers Diversified announced it will preserve cash by paying 90% of its first-quarter dividend in stock and the rest in cash instead of its previous all-cash approach. Prior to the Otto family deal, the company sold 8.6 million shares in December, raising $43 million.

Developers Diversified on Monday reported a loss in funds from operations of 95 cents a share for the fourth quarter after factoring one-time charges totaling $216 million including write-downs of the values of properties and equity investments. Developers Diversified's rental rates on new leases and renewals rose by 4%, a smaller increase than those posted by several of its peers. The occupancy of the company's portfolio declined to 92.2% from 96% a year ago.