Nov. 20 (Bloomberg) -- Blackstone Group LP, manager of the world's largest buyout fund, agreed to acquire billionaire Sam Zell's Equity Office Properties Trust for about $20 billion in the biggest takeover of a real estate company.

Equity Office shareholders will receive $48.50 a share, 8.5 percent more than Friday's closing price, the companies said in a statement yesterday. Including debt, the transaction is worth $36 billion, exceeding this year's $33 billion purchase of hospital chain HCA Inc. to become the biggest leveraged buyout in history.

Blackstone is gaining 580 office buildings spread from New York and Washington to Los Angeles as rents increase and vacancies fall. Takeovers of property companies doubled this year to $189 billion as investors including shareholder activist Carl Icahn and real estate developer Larry Silverstein pursue deals, data compiled by Bloomberg show.

``This company's assets are incredibly valuable,'' said James Corl, head of real estate investment at New York-based Cohen & Steers Inc., which held 28.9 million shares as of September, making it the company's largest holder. ``It's the premier office portfolio in the country.''

Blackstone has acquired 10 publicly traded real estate companies in the past two years, including CarrAmerica Realty Corp. and MeriStar Hospitality Corp. The New York-based company, founded by Stephen Schwarzman and Pete Peterson, raised a $5.25 billion fund to make property acquisitions in June.

Zell's Stake

Zell, 65, started Chicago-based Equity Office in 1976 and the company quadrupled in size following more than $17 billion of acquisitions since shares were first sold to the public nine years ago. Zell owns 1.9 million shares of Equity Office, valued at $92 million at the price offered by Blackstone. He's also chairman of Chicago-based Equity Residential, the largest publicly traded owner of apartments in the U.S.

U.S. office vacancy rates fell in the third quarter to 12.96 percent from 14.13 percent a year earlier, and rents for so-called Class A space in Manhattan rose last month to a record $63.26 per square foot, according to Colliers International. New construction has lagged behind an increase in demand as the economy adds jobs, pushing up rents.

``Office properties are increasing in value in the eyes of private equity investors,'' said Srikanth Nagarajan, an analyst at RBC Capital Markets in New York. Buyout firms more than doubled their acquisitions of property companies to $16.5 billion this year before the Blackstone announcement, Bloomberg data show.

Boston Properties Inc., the real estate investment trust run by Mortimer Zuckerman, agreed today to sell 5 Times Square, a Midtown Manhattan skyscraper, for about $1.28 billion to AVR Realty Company LLC. At $1,168 a square foot, the price is a record for a U.S. office tower, said Dan Fasulo, director of market analysis for Real Capital Analytics, a real estate data service.

Share Performance

Shares of Equity Office rose $3.42 to $48.14 in New York Stock Exchange composite trading today. The stock gained 47 percent this year through Nov. 17, almost double the advance of the Bloomberg REIT Index. The REIT index rose 3.6 percent today, led by Equity Office, Mack-Cali Corp. and Boston Properties.

``The wind is generally at this company's back as office market fundamentals improve,'' JPMorgan Chase & Co. analyst Anthony Paolone wrote in an Oct. 31 research note, the day Equity Office reported third-quarter results.

In the past three years, the company's stock rose 60 percent, trailing the 69 percent increase in the REIT index. Equity Office trails New York-based SL Green Realty Corp., Brookfield Properties Corp. and Vornado Realty Trust, and Boston-based Boston Properties Inc. in five-year annualized total return, including reinvested dividends, according to Bloomberg data.

`Shareholder Value'

``Our ultimate goal has always been to maximize shareholder value and we believe we have done that through this transaction with Blackstone Group, one of the world's premier private equity firms,'' Equity Office Chief Executive Officer Richard Kincaid said in the statement released late yesterday.

Equity Office is ``worth a lot more'' than $48.50 a share, said Corl said.

Merrill Lynch & Co. was Equity Office's financial adviser, while Blackstone worked with Goldman Sachs Group Inc., Bank of America Corp., Bear Stearns Cos. and Morgan Stanley.

Equity Office, which operates in 16 states, has been getting out of markets including Atlanta and buying properties in areas with rising rents such as New York to boost profit.

Equity Office in August said it planned to sell as much as $3.5 billion of real estate by the end of next year to reduce debt. Company spokeswoman Terry Holt said the decision wasn't intended to be part of a broader effort to sell the entire company.

``All the changes we put in place were designed to build a better long-term public company,'' Holt said.

Biggest LBOs

LBO firms including Blackstone, which finance the bulk of their takeovers using the target company's cash flow, have announced $600 billion of acquisitions so far this year, up from $241 billion in 2005, according to Bloomberg data. Total mergers and acquisitions have reached $3.1 trillion this year, surpassing 2000 as the busiest ever.

The biggest LBO to date was the purchase announced in July of HCA, the largest U.S. hospital chain, by Bain Capital LLC, Kohlberg Kravis Roberts & Co., Merrill Lynch & Co. and HCA co- founder Thomas F. Frist Jr. That topped the $31.3 billion that KKR paid in 1989 for RJR Nabisco Inc.

To contact the reporters on this story: Dana Cimilluca in New York at dcimilluca@bloomberg.net; Brian Louis in Chicago at blouis1@bloomberg.net.

Last Updated: November 20, 2006 16:20 EST