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So now, without further ado, our first edition of PERE Friday:
Taking Sam Zell private?
The popular press has been abuzz these days trying to determine how high private equity firms can go. In the wake of the $33 billion (€26 billion) takeover of HCA, pundits’ predictions have ranged from the somewhat absurd (Microsoft) to the somewhat more probable (Ford). According to Tony James, president of The Blackstone Group, private equity firms will be limited not by the size of their checkbooks, but rather by the capacity of the debt markets. Is a $50 billion LBO possible? $75 billion? Stay tuned.
Similar questions are now enveloping the private equity real estate industry. Opportunity funds are flush with capital; public REITs are trading, by many accounts, at a discount to net asset value; and rumors are swirling about a possible takeover of Equity Office Properties, the largest REIT in the US.
Given that any reasonable bid for Equity Office would have to approach $30 billion, the question may not be is a takeover of the company likely, but rather is it even possible? The answer, according to some industry practitioners: maybe.
In real estate, where the debt markets are much deeper and broader than in the leveraged loan and high yield arenas, the ceiling may be set by the equity markets instead of the debt. Assuming that the equity component of a $30 billion deal would comprise approximately 20 percent of the purchase price—a figure relatively close to the equity check in the $9 billion acquisition of Trizec—investors would need to come up with $6 billion. Given the relatively small size of opportunity funds versus private equity vehicles, as well as the paucity of “club deals” in real estate, such a figure would not easily be reached. (Assuming that some firms such as Blackstone, Morgan Stanley and Goldman Sachs are even comfortable writing a $1 billion check, they would still need to not only work together, but also to marshal a number of other institutions to their cause.)
The countervailing view is that private equity real estate firms are not the only ones with deep pockets. By teaming up with their own limited partners or even another publicly traded REIT (as in the Trizec deal), firms may be able to significantly expand their purchase power. As one placement agent told PERE: “There is unlimited co-investment capital in the market today.”
That sentiment would jive with the rumors earlier this year that the California Public Employees’ Retirement System was in talks with Sam Zell, Equity Office’s chairman, about a possible deal. The largest pension fund in the US teaming up with the country’s largest owner of office buildings? Throw a couple private equity real estate firms into the mix and suddenly $30 billion doesn’t sound that far off.
“Nothing surprises me,” one property analyst told PERE, commenting on the possibility of Equity Office going private. “It would certainly be a whopper of a transaction, but the money seems to be there. Who knows?”