Blackstone Wins Takeover Battle For Equity Office Properties

Blackstone Group won control of Equity Office Properties Trust Wednesday after a majority of the top U.S. office landlord's shareholders accepted the private equity firm's cash bid of $23
billion, and rival bidder Vornado Realty Trust dropped out.

Blackstone will pay $55.50 per share in cash for Equity Office , which is the largest office landlord after the U.S. government. Vornado withdrew its $56 per share cash and stock proposal earlier Wednesday, saying the premium it would have to pay would not be in its shareholders' interest.

"I think we're pretty confident we got full value out of the transaction," said Equity Office Chief Executive Richard Kincaid. Nonetheless, Kincaid said the transaction "is a little bittersweet for all of us."

Blackstone and Vornado had been locked in a bidding duel for control of Chicago-based Equity Office, founded by now billionaire Sam Zell, in what was the biggest-ever contest for a real estate investment trust (REIT).

The $55.50 price represents a roughly 24% premium to Equity Office's closing price of $44.72 on November 17, the last trading day before Blackstone's original offer on November 19.

Equity Office directors had recommended Blackstone's lower bid because it is all cash and is expected to close by Friday. Vornado's proposal included stock and could have taken months to close. More than 92% of votes cast, representing about 71.3% of all Equity Office shares, favored Blackstone's offer, Equity Office said.

Property Sales

Blackstone is paying a hefty price but will be able to make a good return on its investment, analysts said. The Wall Street Journal reports that Blackstone intends to sell part of the New York portfolio of office buildings it is acquiring from Equity to Macklowe Properties, a private New York landlord, for around $7 billion.

The sale will include around 6.5 million square feet of so-called class A, or top-rated Manhattan office space. People familiar with the matter say other buyers could be involved in the deal. The price would put the sale at over $1,000 a square foot. 

"We think that Blackstone will make at least a 50% return on their $3.5 billion or $4 billion equity investment, and will make that return in a two-to three-year period," said Stifel, Nicolaus & Co. analyst John Guinee.

Real estate investors, often armed with low-interest rate debt, are attracted by returns generated by rising rents, which are expected to continue to climb, especially in cities like New York and Los Angeles.

Despite the attraction of the Equity Office portfolio--about 543 buildings and 103.1 million square feet of office space--analysts gave Vornado credit for walking away. "The price started getting too high," said Green Street Advisors analyst Michael Knott. "I'm sure they wanted to buy it, but you have to respect their discipline."

Including debt, Blackstone's offer is valued about $39 billion, making it one of the biggest-ever leveraged buyouts.
    
Personality Battle

The battle for Equity Office involved some of the biggest personalities in the real estate and private equity industries. It pitted Vornado's chief executive, Steven Roth, against Blackstone CEO Stephen Schwarzman, whose private equity firm has played a central role in a wave of real estate deals.

Some Equity Office shareholders are dedicated real estate investors whose funds are mandated to invest in REITS. For some of them, Vornado stock was as attractive as cash, given the company's real estate track record. Some of these REIT investors would have preferred to see Equity Office's assets remain under the control of a public company.

Nonetheless, Equity Office's biggest institutional shareholder, which had supported Vornado's offer, was satisfied with the outcome. "As an Equity Office shareholder, it turns out to have become a much better process to extract value out of this company," said Martin Cohen, co-chief executive of asset manager Cohen & Steers, which controls about 8% of Equity Office.

"As a Vornado shareholder, I think they fought a very good battle but in the end became very disciplined and decided not to overpay," Cohen added.

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