NEW YORK (Reuters) - Private equity firm Blackstone Group won a 3-month bidding war to acquire Equity Office Properties Trust EOP.N on Wednesday after a majority of the top U.S. office landlord's shareholders accepted Blackstone's $23 billion bid and Vornado Realty Trust VNO.N dropped out.
Blackstone will pay $55.50 per share in cash for Equity Office -- the largest office landlord after the U.S. government.
Vornado withdrew its $56 per share cash and stock proposal earlier on Wednesday, saying the premium it would have to pay would not be in shareholders’ interest.
“We’re pretty confident we got full value out of the transaction,” Equity Office Chief Executive Richard Kincaid said.
Nonetheless, he said the transaction “is a little bittersweet for all of us.”
Blackstone, has been one of the private buyers driving up real estate investment trust (REIT) stocks. These buyers have been able to finance their purchases with 80 percent to 95 percent of debt. But public companies, subject to shareholders’ approvals and rating agencies, are constrained in their use of leverage.
Publicly traded office REITs provided investors with a 39.8 percent return in 2006, beating the overall return of 29.5 percent for all equity REITs in the FTSE NAREIT U.S. Real Estate index. The Standard & Poor's 500 .SPX returned 15.8 percent in the same period.
Blackstone and Vornado had been dueling for control of Chicago-based Equity Office, founded by now-billionaire Sam Zell, in what was the biggest-ever contest for a REIT.
The $55.50 price represents a roughly 24 percent 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 percent of votes cast, representing about 71.3 percent of all Equity Office shares, favored Blackstone’s offer, Equity Office said.
Blackstone will contribute $3.75 billion in equity financing and get $31.9 billion of debt financing to purchase Equity Office, according to a filing on Tuesday with the U.S. Securities and Exchange Commission.
To compensate for the rich deal price, Kincaid expects Blackstone will sell a larger part of Equity Office’s property portfolio than originally expected. Last month, UBS said Blackstone’s bid suggested it was targeting the sale of up to 70 percent of Equity Office’s assets.
Blackstone plans to sell some of Equity Office’s New York office buildings to Macklowe Properties for about $7 billion, said a source close to the deal. Blackstone and Macklowe could not immediately be reached for comment.
But the Wall Street Journal’s online edition reported that deal would include around 6.5 million square feet of premium Manhattan office space.
“We think that Blackstone will make at least a 50 percent return on their $3.5 billion or $4 billion equity investment and will make that return in a 2- to 3-year period,” said Stifel, Nicolaus & Co. analyst John Guinee.
Real estate investors are attracted by returns generated by rising rents, which are expected to continue to go up, especially in cities such as 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.”
Vornado stock closed up 8.75 percent at $135.75, after earlier touching an all-time high of $135.90.
The MSCI US REIT .RMZ2 index, which measures overall REIT stock price movements, hit a high of 1234.01 before settling back to 1233.66, up 2 percent, with such companies as Vornado and Simon Property Group Inc. SPG.N hitting new highs.
“There’s just so much money being allocated to other groups and rotated out of EOP,” said Robert Gadsden, portfolio manager of Alpine Realty Income Growth Fund.
Including debt, Blackstone’s offer is valued about $39 billion, one of the biggest-ever leveraged buyouts.
CULT OF PERSONALITY
The battle for Equity Office involved some of the biggest personalities in the real estate and private equity industries.
It pitted Vornado 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.
Equity Office’s biggest institutional shareholder, who had supported Vornado’s offer, said he 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 percent 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,” he added.
Additional reporting by Ben Klayman, Kim Dixon, Ilaina Jonas and Michael Flaherty
Our Standards: The Thomson Reuters Trust Principles.