Friday Letter Clash of the Titans

Everyone likes a good cliffhanger, be it on the silver screen or in the trenches of the the biggest private equity real estate deal of all time. The hallmark of a suspenseful story, of course, is that you never know what’s going to happen next.

So, just when you think Jaws is dead, the shark bites off the back of the boat and eats Robert Shaw. Similarly, right when you think Blackstone has sealed its acquisition of Equity Office Properties, another investor consortium comes hurtling out of the deep.

The question now is: how big is the deal going to get?

The story already had the stuff of legend. Last November, The Blackstone Group agreed to pay $19 billion (€15 billion) for EOP, the largest real estate company in the US, while assuming the $17 billion of debt already on EOP’s books. At $36 billion, the deal became the largest private equity transaction ever (real estate or otherwise). Not only that, the EOP acquisition represented the pinnacle of the take-private trend that had proliferated throughout 2006, causing many to speculate that the days of the public-private REIT arbitrage were over.

Then, last week, the plot thickened as word leaked that US distressed investor Cerberus Capital Management was looking to make an unsolicited offer for EOP. The rumor mill churned: Cerberus would team up with Starwood Capital or Walton Street Capital to mount the bid, which, it was said, could hit the $38 billion mark. Earlier this week, it was then reported that New York REIT Vornado was joining the Cerberus-led consortium. (Vornado had previously held discussions with Equity Office prior to the announced deal with Blackstone.)

By Wednesday, Cerberus was out. By Thursday, Vornado, Starwood and Walton Street were at the table with a $39 billion bid, valuing the REIT’s shares at $52 each. Sources close to the deal stressed that the rival bid was still at an indicative stage and details about the financing package were scarce, though the bid reportedly contains a significant amount of Vornado stock.

Befitting its star-studded cast, the EOP deal has dominated the headlines as well as conversation throughout the industry. At the IMN conference this week in Southern California, the heartland of the movie business itself, participants followed the plot twists on their Blackberries, discussed the deal’s finer points over cocktails and debated the size and speed of the transaction. While many believed that Blackstone’s initial deal was a smart play, the consensus became decidedly mixed as the price for the company quickly increased.

“Yesterday, Equity Office Properties was probably an opportunistic deal,” one participant quipped. “Today, it’s probably value-added.”

And tomorrow? Who knows. But stay tuned. The ending has all the makings of a blockbuster.

PS: The polls for The 2006 Global PERE Awards are open until January 31st. Cast your vote for the industry’s leading personality of 2006, the year’s best exit and many other categories. To vote, go to