Equity Office Bid Hike Makes Office Values Reach the Sky

Equity Office Property (EOP) is up another 3% at $54.35 on an even higher bid of $54.00 cash from the Blackstone Group.  Blackstone is raising its bid by 11% from the $48.50 and is bidding above the Vornado (VNO) led consortium’s bid of $52.00 per share.

This turning into a feeding frenzy and it may even get more revistited bids now.  The termination fee has also been raised from $200 million up to $500 million, so this is requiring more and more skin in the game from any challengers.  The board of trustees has approved the merger agreement’s amendment and recommends Equity Office’s shareholders approve the Blackstone deal; and it will hold a special shareholder meeting scheduled for February 5 to vote on the merger agreement with an estimated February 8 completion.

The most recent balance sheet listed $22.9 Billion in property values, plus another $454 million in long-term investments; total assets were listed at $25 Billion. It had $18.6 Billion in liabilities as well.  Unfortunately the company has been doing a tender for $8.4 Billion in outstanding debt from its operating limited partnership, so trying to use the balance sheet and combining all of the property deals Equity Office has been in makes a comparison for a non-bidder sort of like using a crystal ball out in the rain.

But this deal is valued at $38.3 Billion if you include the debt.  This $500 million termination fee that would have to be paid to Blackstone if it walks away is likely going to make the street think this will be the price, although it is trading at a slight premium to the $54.00 buyout so there are some hopes still alive for another challenge.  It is not a cheap deal at all based on property values and debt, but it makes sense to Blackstone on a cash flow basis.  It is also safe to assume that Blackstone will be spinning off many of the properties in short order and I’d bet the over that many of the properties are worth more in individual sales than they are being carried for on the balance sheet.

At September 30, Equity Office had an office portfolio comprised of whole or partial interests in 585 office buildings in 24 Metro areas and in 100 submarkets.  The company does over $800 million in revenues, but interestingly enough it posted a net loss last quarter after higher interest expenses following 2 sequential declines in revenues.  EOP is not expected to be a money loser for the future and there are items that caused their loss, so it isn’t as though Blackstone is just trying to turn around a money-losing group.

Blackstone thinks they are doing the right thing and thinks there is a lot of hidden value not being carried on the deal but this may be more and more proof for the nay-sayers and private equity critics of a private equity bubble and proof that large private equity transactions may be more influenced by size rather than value.  Those who follow M&A and private equity are definitely going to try to watch this, because this could very well end up being the crux university case studies for years into the future.  The verdict is going to be out on this for a while, but Sam Zell is going to be able to ride his Harley off into the sunset with a much larger payday than before.

Other large office REIT’s are benefitting from this bidding war: Boston Properties (BXP) up 0.8% at $122.90, Mack-Cali (CLI) up 0.3% at $54.82, Brandywine (BDN) up 1% at $34.34, Alexandria (ARE) up 0.5% at $102.99, HRPT (HRP) up 0.25% at $12.80, and Corporate Office (OFC) up 0.4% at $51.95.  Most of these are around their year highs as well.

Jon C. Ogg
January 25, 2007