Feb. 1 (Bloomberg) -- Vornado Realty Trust raised its bid for Equity Office Properties Trust to about $41 billion in cash and stock, topping Blackstone Group LP's $38.3 billion offer in the competition for the biggest real estate takeover ever.

Vornado offered $56 a share for the largest U.S. office landlord, compared with Blackstone's all-cash bid of $54. New York- based Blackstone said today in a statement that it doesn't plan to raise the offer, which Equity Office directors accepted on Jan. 25. Shareholders are scheduled to vote on Monday.

``The Vornado offer is superior and potentially better than cash,'' said James Corl, who helps manage 29 million Equity Office shares and 6.8 million Vornado shares for Cohen & Steers Capital Management in New York. ``If Blackstone comes back at $58, we'll give them a big hug. Right now, we'll give Vornado a big hug.''

The fight for Chicago-based Equity Office pits Steven Roth, 65, who built Vornado over 27 years from an owner of discount New Jersey department stores into Manhattan's biggest commercial landlord, against Stephen Schwarzman, 59, who has helped lead about $160 billion of leveraged buyouts since co-founding Blackstone in 1985. They are vying for the largest collection of office properties in the U.S., with a combined 103 million square feet in 543 buildings.

`True Value'

Blackstone said its offer is still superior. ``The true value of Vornado's offer should reflect a discount for stock, the three to four month time delay before receiving it and the risk of Vornado's share price declining,'' Blackstone said in an e-mailed statement. Vornado shareholders also might reject the deal. ``We are proceeding with a Feb. 8 closing, following the Feb. 5 Equity Office shareholders meeting,'' said Blackstone.

Vornado shares rose $3.39 to $125.74 in New York Stock Exchange composite trading at 4:10 p.m.

Vornado's stock could fall 15 percent from $125, or to $106.25, and its offer still would surpass Blackstone's $54, based on the ratios Vornado set, said Dean Frankel, a money manager at Urdang Securities in Plymouth Meeting, Pennsylvania. If Vornado shares fell to $115, Equity Office shareholders would still get $56 a share, he said.

``What a smart bid,'' Frankel said. ``Hopefully, the Equity Office board will figure that out.''

Urdang Securities owns about 1.1 million Vornado shares and almost 2 million Equity Office shares, Frankel said.

`In Due Course'

In a statement, Equity Office said it continues to recommend Blackstone's bid and would evaluate the Vornado offer ``in due course.''

Blackstone already has struck a deal with bondholders, offering to pay almost $950 million for $725 million of Equity Office bonds to get rid of covenants that would prevent the buyout firm from adding secured debt to the balance sheet to boost equity returns.

Equity Office shares fell 40 cents to $55.15.

In a letter sent to Equity Office Chairman Sam Zell yesterday, Vornado said a ``substantial percentage'' of investors has agreed to vote for the transaction. The company also said there will be no delay in closing the deal because it plans a single joint proxy vote with Equity Office for the transaction.

F&C Asset Management favors Vornado's offer, said Dirk Molenaar, the firm's senior portfolio manager for global real estate securities, who helps oversee about 1.4 billion euros ($1.8 billion).

`Experienced and Opportunistic'

``Vornado's offer is superior,'' Molenaar said in a telephone interview from Amsterdam. ``These guys know what they're doing. They're very experienced and opportunistic and they are considered one of the top management teams in the REIT sector.''

F&C owned about 616,900 Vornado shares and 511,864 Equity Office shares as of last September, according to SEC filings.

Molenaar said he would be happy to be paid with more stock in Vornado. ``They want to increase their exposure to high-barrier-to- entry markets like Manhattan, Washington D.C., California and Seattle,'' Molenaar said. ``In these markets, supply is limited and job growth is somewhat stronger so the balance between supply and demand is more in favor of the landlord.''

Molenaar said he isn't concerned that Vornado may be paying too much for Equity Office. ``They're probably paying a full price, but it's all about what you expect. If the current macroeconomic situation stays as it is with slow growth and no recession, that's favorable for the REITs and will keep attracting money to the sector,'' he said.

`Mistake'

Roth, who in June said every deal the company passed up in the past decade was ``a mistake,'' wants to bolster Vornado's holdings on the East and West coasts.

Vornado, whose offer is $31 in cash and $25 in Vornado stock, put a so-called collar on its bid that fixes the value at $56 a share as long as the company's stock doesn't fall below $115 or rise above $135. If the stock falls below the bottom end, which is 6 percent lower than the price Vornado shares closed yesterday, for example, the value of its offer will start to sink.

Vornado values its bid at $41 billion including debt and dividends, according to a statement posted on its Web site. If Vornado wins the bidding and is able to close the deal in four months, Equity Office stockholders would get about 50 cents a share in additional dividends, based on the company's quarterly payout of 33 cents.

Vornado's original proposal on Jan. 17 for $52 a share included two partners, Walton Street Capital LLC, founded by Neil Bluhm and based in Chicago, and Greenwich, Connecticut-based Starwood Capital Group LLC, founded by Barry Sternlicht.

Vornado intends to sell about $20 billion of Equity Office's portfolio in the first year, Vornado said on its Web site. Up to $10 billion of assets may be sold at closing to its former bidding partners, Walton Street and Starwood Capital.

`Trophy' Assets

Vornado would keep buildings in New York City, Washington, Boston, the San Francisco Bay Area and Los Angeles, the company said.

The properties it would acquire, including the Ferry Building in San Francisco, Market Square in Washington, 60 State Street in Boston and Worldwide Plaza in New York, are an ``irreplaceable portfolio of trophy quality assets amassed over several decades,'' Vornado said.

Vornado received debt financing of as much as $30.5 billion from Lehman Brothers Holdings Inc., JPMorgan Chase & Co., Barclays Capital, RBS Greenwich Capital and UBS, it said on its Web site.

Vornado has been considering an offer for six months, the company said on its Web site. ``Our pricing reflects the market price for these assets,'' the company said. ``We do not believe that we could assemble this portfolio of assets on a one-off basis; and, even if we could, the price per asset would be higher.''

Vornado said it would increase rents and retain existing local managers. And it rejected the idea that it was buying Equity Office because bigger is better.

``We have no interest in being a large national company, only in being the best company,'' it said.

Rival Bids

Vornado would have to issue 96.7 million shares under its proposal, Sri Nagarajan, an analyst at RBC Capital Markets in New York, wrote in a note to investors before Vornado made its latest offer.

``We believe the new Vornado offer may not be deemed superior,'' Nagarajan wrote in a note to investors today.

Since Vornado's proposal includes 45 percent Vornado equity, plans for asset sales of $20 billion will not add to Vornado's earnings until 2008, Nagarajan wrote.

Earlier Talks

Equity Office accepted Blackstone's original Nov. 19 bid of $20 billion, or $36 billion with debt, after failing to come to terms with Vornado and other potential suitors during the previous year.

Under the terms of its agreement with Equity Office, Blackstone would have three days to respond to a bid that Equity Office's board determined was superior. Should Equity Office be acquired by another bidder, the company will owe Blackstone $500 million, according to the accord.

``I would guess Blackstone has a wish list of companies they are targeting and at a certain moment, they will think `enough is enough and we'll go on to No. 2 on our list,''' Molenaar said. ``If they don't get this deal, they can walk away with $500 million.''

Blackstone's real estate group is among the world's most active, having made 181 transactions with a total value of more than $43 billion, including debt, since it was started in 1992.

Blackstone's negotiations have been led by Jonathan Gray, co- head of the firm's real estate team. Gray, a 15-year Blackstone veteran, has led the buyout of 10 public real estate companies valued at more than $32 billion, according to the firm's Web site.

To contact the reporters on this story: Hui-yong Yu in Seattle at hyu@bloomberg.net; Bob Ivry in New York at bivry@bloomberg.net.

Last Updated: February 1, 2007 16:32 EST