At 11am in Chicago yesterday, when Equity Office Properties chief executive Richard Kincaid stood up to address his shareholders ahead of a vote on a potential buyout, The Blackstone Group was just the world’s biggest private equity firm.
Fifteen minutes later, when Kincaid sat down again and 92 percent of shareholders present had voted in favour of its bid, Blackstone was also the biggest private landlord in the US, as it finally triumphed in the hard-fought bidding war for Sam Zell’s commercial real estate empire.
Blackstone’s winning offer of $55.50 per share in cash – amounting to a total deal value of $39.2 billion (€30.2 billion) including debt – makes this the biggest leveraged buyout on record. Its prize is a real estate investment trust that owns more than 100 million square feet of commercial property at 543 different sites. Only the US government now owns more real estate in the country.
But victory came at a high price. Blackstone’s winning bid was 14 percent above the price it had initially agreed, meaning that it is taking its biggest bet to date. Ned Spieker, a commercial property investor quoted by Bloomberg said: “By their own admission Blackstone didn’t want to go over $54. I wouldn’t have, if I were them.”
The deal will require a massive debt package of $31.9 billion, drawn from a consortium of lenders, plus a $3.5 billion bridge loan. The equity cheque of $3.75 billion will be drawn partly from the private equity firm’s existing real estate vehicle, Blackstone Real Estate Partners V, which closed on $5.25 billion last year. However, most firms have a limit on what percentage of a fund can be invested in any one deal, and besides, this fund is almost completely invested – so Blackstone will have to raise additional capital to fund the deal, probably in the form of co-investment from its limited partners.
The likely result is that Blackstone will need to start selling off EOP assets, to defray the costs of the acquisition. Already, Blackstone is reportedly in talks with a number of buyers to flip parts of the EOP portfolio. The first of these deals could be completed this week, with Blackstone reportedly selling eight New York office buildings to Macklowe Properties for $7 billion.
Some commentators have suggested that the deal is nothing more than a bet on commercial property prices increasing. But others dismiss that idea, arguing that this kind of bet is not Blackstone’s style. Instead, the firm could generate value by breaking up the empire and selling off its constituent parts. A UBS note last month suggested that as much as 70 percent of EOP’s assets could be sold in this way, to make sure the EOP investment meets Blackstone’s return requirements.
The battle to secure EOP turned out to be a close-run thing for Blackstone.
The firm seemed to have clinched a deal for the company back in November, when it offered to buy EOP for approximately $19 billion, while assuming $17 billion debt. Under that agreement, shareholders were to receive $48.50 in cash per share – a 20.5 percent premium over Equity Office’s average closing price in the three months prior to the offer.
However, as real estate prices continued to rise, speculation mounted that the deal was under-priced, and last month a rival consortium of property investors – comprising Vornado Realty Trust, Starwood Capital and Walton Street Capital – emerged to challenge the bid. This prompted a high-stakes bidding war.
After the Vornado group trumped Blackstone’s offer with a $52 per share bid, Blackstone was forced to raise its offer to $54 per share last week. The Vornado consortium then countered by raising its own bid to $56 per share, of which $31 per share would be payable in cash and the remaining $25 in Vornado stock. In response to shareholder concerns that it would take too long to see their money, it then brought forward the timetable to pay out the cash element.
Although Blackstone had retained the support of the EOP board throughout the process, at this point its bid looked to be second favourite with shareholders. Indeed, some commentators suggested it should just withdraw and collect the $500 million break fee it had agreed in the event of the bid failing.
But the buyout firm was not to be denied. On Monday, the day before the vote, it raised its bid again to $55.50 per share in cash, and promised shareholders it could complete the deal within two days. It also increased its break fee to $720 million.
It proved to be a knockout blow. On Tuesday Vornado withdrew from the bidding, saying that the premium it would have to pay to top Blackstone’s latest bid, combined with the increased breakup fee, was “not in its shareholders’ interest”. By 11.15 on Wednesday morning, EOP’s assets had become the latest additions to Blackstone’s bulging real estate portfolio.
The only question is, how long will some of these assets stay there?
Paul Fruchbom and Sushil Cheema contributed to this report.