Even Higher Bid for Equity Office

Vornado Ups Ante With Record Offer

Vornado Realty Trust raised its offer for office landlord giant Equity Office Properties Trust, topping an earlier bid by Blackstone Group, in what has become the biggest buyout showdown in history.

Vornado would pay $56 a share in cash and stock while assuming Equity Office's debt, which the company said on its Web site would put the transaction's total value at $41 billion. That is $2 a share higher than the all-cash offer last week by private equity titan Blackstone. If approved, either bid would win the title as the largest leveraged buyout ever.

The Blackstone deal, valued at $38.3 billion, was just four days away from a shareholder vote when Vornado announced its proposal yesterday. Blackstone responded that it has "no intention" of raising its bid and assailed the stock component of Vornado's offer as risky.

The bidding war for Equity Office, the nation's largest office landlord, has seen several escalations on both sides, reflecting the intense interest in commercial real estate as office rents hit record levels and vacancy rates plummet.

It is reminiscent of the landmark battle for RJR Nabisco in 1988. In that case, the price got so high that the winning bidder, private equity shop Kohlberg Kravis Roberts, had to take on a huge amount of debt to close the $31.3 billion deal. Ultimately, RJR Nabisco's interest expense and capital expenditures were higher than the cash flows produced by the business.

"Since the RJR Nabisco deal, there hasn't been anything close to that size until really the last 18 months," said Colin Blaydon, director of the Center for Private Equity and Entrepreneurship.

The size of that takeover was so extraordinary at the time that it became the subject of a book, "Barbarians at the Gate," which detailed the corporate egos and excesses of the deal. Now multibillion-dollar buyouts barely raise eyebrows on Wall Street.

Private equity firms spent a record $540 billion for leveraged buyouts last year, up from $59 billion in 2003, and all five of the top deals in 2006 topped $25 billion in total value, according to Bloomberg Financial.

Vornado's latest offer demonstrates the lengths to which Chairman Steven Roth will go to acquire Equity Office.

Last summer, Roth approached Equity Office's founder, Samuel Zell, to propose a merger of their companies. The deal would have combined the two largest office landlords in the country, creating a real estate powerhouse that would own some of the most valuable properties in major metropolitan areas, including Washington, New York, Boston, San Francisco and Los Angeles. Locally, Vornado owns significant office buildings on K Street and in Northern Virginia while Equity Office holds major pieces of Reston Town Center, the Army and Navy Club on I Street NW and Market Square on Pennsylvania Avenue NW, among others.

But negotiations broke down over the price. In the fall, Blackstone, one of the nation's largest private equity firms and a major player in commercial real estate, swooped in with a $48.50-a-share offer. The all-cash deal was worth $36 billion including debt. In November, Equity Office's board recommended that shareholders approve Blackstone's bid.

Vornado fired back, joining with two other real estate investors, Starwood Capital and Walton Street Capital, to offer a preliminary bid for Equity Office worth $52 a share. Blackstone then countered with its latest offer of $54 a share.

Vornado's partners dropped out of the bidding, balking at the escalating price, according to a person involved in the consortium who spoke on the condition of anonymity.

But Roth decided to continue the pursuit on his own. A Vornado spokeswoman said the company is in negotiations to sell up to $10 billion of Equity Office's properties at closing to Starwood Capital and Walton Street Capital and would spin off an additional $10 billion of assets later.

Blackstone still has several advantages, despite its lower offer. For one, Equity Office would have to pay a $500 million breakup fee if it sells itself to another bidder. Vornado's deal also requires the approval of its shareholders and would take longer to close. Moreover, because 45 percent of Vornado's offer is funded with its stock, the money paid to Equity Office shareholders could change if Vornado's stock price dips below $115 per share or rises above $135 per share.

Yesterday, Equity Office's shares closed at $55.15, near the midpoint between Blackstone's and Vornado's offers, which analysts said reflects the uncertainty over who will walk away with the ultimate prize in this bidding war.

Staff writer Dana Hedgpeth contributed to this report.