The Blackstone Group has won the bidding war for Sam Zell’s Equity Office Properties after the real estate investment trust’s shareholders voted to approve the firm’s offer of more than $22 billion plus $17 billion in debt, or a total of $39 billion (€30 billion).
Shareholders will receive $55.50 in cash per share. The deal is expected to close as early as February 9.
Vornado today dropped out of the bid for Equity Office, saying in a statement that the premium it would have to pay to top Blackstone’s latest bid, combined with the increased breakup fee, was “not in its shareholders’ interest.”
The battle for Equity Office kicked off in November, when Blackstone agreed to buy the largest owner of office properties in the US for approximately $19 million plus $17 million in debt. Under that agreement, shareholders were to receive $48.50 in cash per share. That value was a 20.5 percent premium over Equity Office’s average closing price in the three months prior to the offer.
Vornado entered the fray in January with an offer of $52 per share, and Blackstone countered by increasing its own all-cash bid to $54 per share last week. The Vornado consortium then brought the bidding war to a record $41 billion with a $56 per share offer, of which $31 per share would be payable in cash and the remaining $25 per share would be subject to a collar agreement.
In an amended offer announced on Monday, Vornado would buy 55 percent of Equity Offices’ shares for $56 per share in cash and the rest in a swap of Vornado’s shares. The tender offer was to begin immediately after Equity Office accepted the firm’s agreement and would close 20 days later, the company said in a statement. The entire transaction would take less than four months to complete, the statement said.
Vornado’s proposal was an attempt to address the company’s concerns that its earlier $41 billion bid lacked a certainty of closure and certainty of value compared with Blackstone’s bid.
Under the terms of the merger agreement between The Blackstone Group and Equity Office Properties, the private equity firm will write a massive equity check of $3.75 billion (€4.9 billion), approximately $550 million more than called for under the original merger agreement signed last year.
In addition to the equity provided by Blackstone, the rest of the financing package includes a bridge loan of $3.5 billion and debt financing of $31.9 billion provided by a consortium of lenders. The original merger agreement between Blackstone and EOP, which was agreed to in November, called for $3.2 billion of equity, as well as a bridge loan of $3.5 billion and debt financing of $29.6 billion, for a total transaction value of $36 billion. To accommodate, the additional debt financing, the original lending consortium of Bear Stearns, Goldman Sachs and Bank of America has been expanded to include Citigroup, Morgan Stanley and Wachovia, among others.
The additional equity financing required by Blackstone is more complicated. According to an interview last year with John Ford, a Blackstone spokesperson, part of the equity will come from the private equity firm’s existing real estate vehicle, Blackstone Real Estate Partners V, which closed on $5.25 billion last year. Although the firm has declined to discuss the specifics of its equity tranche, it will have to secure additional capital beyond its current fund. Private equity firms are usually prohibited from investing more than a given percentage of a fund’s total capital, typically 20 percent, in any one deal.
Blackstone has already invested or committed almost 100 percent of its existing real estate fund in the acquisitions of CarrAmerica and Trizec Properties, among other deals. The most likely option for Blackstone would be to raise co-investment capital from some of its limited partners, which include some of the largest pension funds in the US such as New York State Teachers, Pennsylvania Public School Employees’ Retirement System and Virginia Retirement System. Blackstone is reportedly in talks with a number of buyers to flip parts of the EOP portfolio simultaneously upon closing, which could also help defray the total costs of the acquisition.
Blackstone is currently raising capital for its latest vehicle, Blackstone Real Estate Partners VI, which has an $8 billion target, but which is widely expected to hit upwards of $10 billion. BREP VI has already secured a number of commitments from limited partners, including $100 million from the state of New Jersey, $400 million from the Pennsylvania Public School Employees’ Retirement System and $75 million from Pennsylvania State Employees’ Retirement System.