Bid Would Create Office Behemoth

By David Cho and Dana Hedgpeth
Washington Post Staff Writers
Friday, January 19, 2007

The record $38 billion buyout bid by an investment group led by Vornado Realty Trust for Equity Office Properties Trust would combine the nation's two largest office landlords, consolidating some of the most valuable commercial real estate in major U.S. cities into the hands of one company.

If the deal goes through, Vornado would own significant office buildings among the cityscapes of New York, Boston, Los Angeles and San Francisco. In the Washington region, Vornado owns prominent buildings on K Street and in Northern Virginia while Equity Office owns major pieces of Reston Town Center, the Army and Navy Club on I Street NW and Market Square on Pennsylvania Avenue NW, among others.

Vornado's offer, announced Wednesday, topped the $36 billion deal proposed in November by Blackstone Group, the nation's second-largest private equity firm. The bidding war between these titans is shaping up to be one for the record books. If accepted, either deal would win the title of the largest leveraged buyout in history, when factoring in Equity Office's debt. Either would top last year's $33 billion acquisition of HCA by a consortium of private equity firms.

The intense interest in Equity Office reflects a consolidation in the industry as office rents are hitting record levels and vacancy rates are dropping. It also follows Blackstone's acquisition of Trizec Properties and CarrAmerica Realty, both large real estate concerns. Vornado is eyeing Equity Office as a chance to expand its real estate portfolio in prime markets, where space is limited and demand is growing.

The battle for Equity Office also underscores the large amounts of cash available for leveraged buyouts. Several Wall Street analysts said it will not take long for this deal to be bested by another.

"There's been a lot of speculation that we could see a $50 billion deal soon," said Robert Keiser, vice president of proprietary research at Thomson Financial. "The sky is the limit. If one firm is capable of taking down a $30 billion firm, where is the ceiling for what two or three or four private equity firms could do [together]?"

The investment group behind Vornado's bid includes some of the most powerful figures of the commercial real estate world, including Vornado chief executive Steven Roth, Barry S. Sternlicht of Starwood Capital Group and founder of the Starwood hotel chain, and Neil G. Bluhm, a Chicago real estate magnate who runs Walton Street Capital. In their proposal to Equity Office, Roth and his partners said their offer would establish the nation's largest real estate investment trust "with the pre-eminent position in the best markets on both coasts."

Standing in their way is Blackstone, founded in 1985 by Peter G. Peterson and Stephen A. Schwarzman, and now one of the nation's largest owners of real estate.

Blackstone brings to the table several advantages despite its lower offer. Equity Office's board has already made the recommendation to accept Blackstone's bid, so the company would owe Blackstone a $200 million break-up fee if it accepted another offer. Blackstone also has the right to match rival bids. Equity Office's board is to decide on the Blackstone proposal Feb. 5.

What's more, Blackstone's bid of $48.50 a share is all cash, while 40 percent of the Vornado group bid of $52 a share would be paid for with Vornado stock. Yesterday, a Blackstone spokesman called Vornado's offer "inferior," saying that it "carries vastly more risk than Blackstone's all-cash deal."

But James S. Corl, chief investment officer for real estate at Cohen & Steers, the largest institutional investor in Equity Office, was excited about Vornado's new bid. "At this point, I think it would be very difficult, almost impossible, for the board to accept $48.50 in light of Vornado's bid of $52," he said.

The deal may well turn on the opinion of Sam Zell, the largest individual shareholder in Equity Office. Zell started Equity Office Properties in 1976 and had a talent for finding distressed properties, fixing them and then reselling them at huge profit. It has 581 buildings and 109.2 million square feet of office space in major metropolitan markets. In 2005, it bought the Verizon Building on Sixth Avenue in Manhattan for $505 million.

Vornado has about 60 million square feet of space, primarily in New York and the Washington area, and a 32.9 percent interest in Toys R Us. In 2002, it acquired Charles E. Smith Commercial Realty, a local real estate developer that built much of Crystal City. Vornado spokeswoman Wendi Kopsick said her company had no comment on its offer.

Equity Office spokeswoman Terry Holt said the board is maintaining its recommendation of the Blackstone deal, but she had "no idea which we'll go with."

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