Equity Office deal pits friends against friends

The battle over the largest private equity deal yet involves the biggest names in private equity and real estate setting personal relationship aside in favour of a bidding slug-fest.

On April 9, 2003, Steve Schwarzman and Barry Sternlicht joined together, presumably for the first time, in a friendly game of hoops. At the Chelsea Piers sports complex on the West Side of Manhattan, the two private equity bigwigs competed in a charity basketball event that pitted them against a team of female collegians. And despite the handicaps of age and athleticism—Schwarzman had missed the event the previous year due to a skiing injury—Schwarzman and Sternlicht were able to eke out a 40-38 victory.

Today, the two find themselves on opposite sides of the court, only this time the stakes are much higher: Equity Office Properties.

On one side of the transaction sits Vornado, led by Steven Roth, who yesterday upped his counter-offer for EOP to $40 billion (€52 billion). If the bid is ultimately successful, Vornado will sell off approximately $10 billion of assets to Walton Street and Starwood Capital, led by Neil Bluhm and Sternlicht, respectively. Their competition: The Blackstone Group, founded by Schwarzman and Peter Peterson.

And in the largest private equity deal ever, the ties between the main players go much deeper than an ordinary basketball game.

Back in the 1980s, JMB Realty, the Chicago real estate firm co-founded by Bluhm, was the breeding ground for many of today’s opportunity fund managers, including Sternlicht and two of the leading members of Blackstone’s real estate group, John Kukral and John Schreiber. (Both are no longer with the private equity firm, though Schreiber still serves as an advisor.)

Bluhm was also one of the first investors in Starwood Capital, contributing $1 million to the fledgling private equity real estate firm. And in the mid-1990s, Peterson was on the board of Rockefeller Center along with Michael Fascitelli, Vornado’s president, when Fascitelli was still at Goldman Sachs.

At the center of the deal, of course, is Sam Zell, the legendary real estate investor whose links to many of the bidders adds an interesting level of intrigue and personal friendships into the mix.

Bluhm, for example, is the other titan of Chicago real estate and has also been a past participant in Zell’s famous Halloween treasure hunts, in which limousines shuttle hundreds of guests around the Windy City in search of clues and prizes.

Then there is Sternlicht, who also has a long relationship with Zell. In the early 1990s, Sternlicht sold a substantial portfolio of apartment buildings to Zell in exchange for a stake in Equity Residential. Sternlicht reportedly earned a substantial gain when the apartment REIT went public shortly thereafter. These days, Sternlicht’s office in Greenwich, Connecticut is filled with a decade’s worth of Zell’s unique holiday greeting cards.

And finally, Roth, who, along with Zell, is one of the preeminent owners of office properties in the country. Given their positions atop the REIT industry, the two have often competed against each other for trophy acquisitions, from the Washington DC real estate firm Charles E. Smith to New York’s Rockefeller Center. But they are also friends—both have served as chairman of NAREIT in recent years and they participate on numerous industry panels together.

The links between Blackstone and Zell are less concrete, perhaps owing to Blackstone’s numerous ventures outside of the real estate arena. The two firms have certainly competed against each other in deals and have occasionally been on opposite sides of the table. But there is little in their history that compares to Zell’s share history with the other participants.

Yet the long relationship between Zell and the various members of the Vornado consortium has not, thus far, resulted in any favorable treatment. (The only real beneficiary of the past two weeks has been Zell, whose take from the deal has increased substantially.) This morning, the board of EOP reaffirmed its support for the all-cash Blackstone bid, citing speed and surety of closing as key factors.

The upper echelons of the private equity real estate industry may be remarkably insular and incestuous, but it is nice to know that money, not friendship, still drives the ultimate decision.

After all, as Gordon Gekko might say, “If you want a friend, get a dog.”

This article originally appeared on sister news site PrivateEquityRealEstate.com