Blackstone hits back in biggest ever bidding war

Blackstone has looked to strike a knockout blow in the battle for Equity Office, a US real estate business owned by Sam Zell, by increasing its bid to $38.3 billion and ramping up its break fee.

The Blackstone Group has hit back after the emergence of a competing bidder for Equity Office, the US commercial real estate business, by increasing its own offer to a record $38.3 billion.

Blackstone has also moved to safeguard its position even further by more than doubling the size of the break fee it is entitled to if the deal falls through. It will now be entitled to $500 million even if it fails to win the battle for Equity Office.

The battle for Equity Office is not only the biggest ever private equity bidding war, but also the second biggest competitive bidding process of any kind in the last two years. It is surpassed only by the contest for Spanish power company Endesa, which has two bids of $51.7 billion and $65.5 billion still pending.

Blackstone’s improved offer equates to $54 per share, $2 per share more than the offer from the real estate consortium and a $5.50 increase on its original offer.

Blackstone had a $48 per share offer accepted by Equity Office in November, but last week saw a consortium comprising Vornado Realty Trust, Starwood Capital and Walton Street Capital submit an indicative bid of $52.50 per share, payable 60 percent in cash and 40 percent in Vornado’s shares.

The offer may be intended as a knockout blow ahead of a scheduled Equity Office shareholder meeting on February 5, when shareholders will vote on whether to accept Blackstone’s offer. Blackstone has already argued that the Vornado consortium’s cash-plus-shares bid is inherently more risky than its own all-cash bid.

In a statement, Equity Office said that in addition to the higher price, “the greater speed and certainty of closing and valuation of the Blackstone transaction” made it a more attractive proposition.

Equity Office said it was still co-operating with the Vornado consortium as it conducted its due diligence, but it has set a deadline of January 31 for any competing offer to be submitted. However, it reiterated its recommendation for the Blackstone offer.

According to data provider Dealogic, in 2006 the value of announced real estate M&A rose 66% to $414.3 billion globally, with a 24% rise in deal activity. In the US, deal activity was slightly down but the total value of deals nearly doubled to $162.3 billion. The figure for 2007 already stands at $55.1 billion.