At Last, Blackstone Bags Equity Office

The private equity group, lured by rising rents at high-end commercial properties, snaps up the real estate outfit in a sweetened $23 billion deal

Talk about pricey real estate. The bidding battle for Equity Office Properties Trust ended Feb. 7 with shareholders embracing a $22.9 billion offer from the Blackstone Group hours after Vornado Realty Trust bowed out of the contest.

Excluding debt, the deal marks the second-largest buyout in U.S. history, after the 1988 acquisition of RJR Nabisco by Kohlberg Kravis Roberts, according to research firm Dealogic. If you add Equity Office's $16 billion debt to the deal, the transaction ranks as private equity's biggest coup to date.

Vornado (VNO), which owns numerous office properties, primarily in midtown Manhattan, stepped aside a day after Equity Office (EOP) accepted a $55.50-per-share cash offer from Blackstone, which also included a $720 million termination fee on the deal. Blackstone also was offering its payment entirely in cash, with a speedy closing—two days after EOP's shareholders voted—while Vornado's $56-per-share bid consisted of cash and stock.

Office Boss

"Vornado concluded that the premium it would have to pay to top Blackstone's latest bid, protected by a twice-increased breakup fee, would not be in its shareholders' interest," the company said in a Feb. 7 statement.

And with that, Vornado shares jumped nearly 8% to an all-time high on Feb. 7 and Blackstone walked away with Equity Office, yet another high-profile publicly traded outfit going private (see, 11/20/06, "Sam Zell: A Question of Timing"). As the largest public owner/manager of high-end commercial real estate, Equity Office controls nearly 600 properties in 16 states and Washington, D.C. And at a time of rising rents and continued strength in that sector of real estate, Equity Office was considered a plum with favorable prospects. Shares of Chicago-based Equity Office fell 1.1%, to $55.45, on the New York Stock Exchange Feb. 7.

The deal turns Blackstone into the nation's biggest office landlord. Last summer, in partnership with Brookfield Properties, Blackstone concluded a takeover of Trizec Properties for $7.2 billion. And that acquisition came after Blackstone paid $5.6 billion for CarrAmerica Realty in July. Add in Equity Office's 109 million square feet in 580 buildings, and Blackstone and its affiliates would own some 160 million square feet of office space in the nation's big city markets. That's more space than downtown Phoenix, Pittsburgh, and St. Louis offer combined.

Rising Too High?

After the deal closes, Blackstone is expected to sell off several New York buildings for about $7 billion to closely held Macklowe Properties of New York, The Wall Street Journal reported Feb. 7, citing "people briefed on the deal." A Blackstone spokesman declined comment.

While Vornado investors appeared pleased, the stock could be overvalued, according to Standard & Poor's equity analyst Royal Shepard, who cut his opinion on the stock Feb. 7. Vornado closed 6.9% higher on Feb. 7, reaching a 52-week high of $135.75, above S&P's $124 target price.

"We see increased downside risk from high valuations amid recent merger activity, and we now view VNO shares as unattractive," said S&P, which, like BusinessWeek, is owned by the McGraw-Hill Cos. (MHP).

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