Affordable Housing Institute : US

 

Zell … ze-ell … ze-elll …

 

So far, the takeover battle between Blackstone and Dove Parent (the Vornado-led group) for the right to take Equity Office private (itself a remarkable event in the capital markets) has been seen mainly as two-handed poker: bet, raise, re-raise.  As summarized by The New York Times, first Vornado raised:

 

Last week, a group of real estate investors led by Vornado Realty Trust made an informal bid of $52 a share in cash and stock for Equity Office, a real estate investment trust founded by the Chicago real estate magnate Samuel Zell.  

 

Start by owning billions’ worth of trophy office buildings

 

Equity Office has since allowed the Vornado team access to its books and has set a deadline of next Wednesday for a formal offer.

 

Last week Blackstone re-raised:

 

The Blackstone Group, a private equity firm, increased its bid for Equity Office Properties to $54 a share. Equity Office is the nation’s largest office landlord, with nearly 600 buildings across the country.

 

The new offer represents an 11% premium over the price that Equity Office and Blackstone had agreed on in November when they announced the deal. With the assumption of $15.3 billion in debt, the deal would have a value of $38.3 billion, Equity Office said in yesterday’s announcement.

 

In pushing more chips toward Equity Office’s current shareholders, Blackstone extracted a significant concession:

 

In exchange for raising its bid, Blackstone got Equity Office to increase the breakup fee — the amount it would receive if its bid failed — to $500 million, from $200 million.

 

In economic terms, who will pay the $500 million breakup fee (assuming it is paid)?  It has to be Equity’s current shareholders, since from Vornado’s perspective, should it win the bid, it will bear the cost of paying out the $500 million — and therefore, Vornado will presumably bid that much less.

 

When deducing motivations, always review the bidding

 

And bid again Vornado presumably will:

 

A spokeswoman for Vornado, a REIT with a diversified portfolio that includes office buildings, retail space and showrooms, said yesterday that the company would respond to the latest offer “at the appropriate time.”

 

In fact, the equity markets clearly think the price will continue to rise, as Equity is now trading above Blackstone’s current offer:

 

Shares of Equity Office rose 8 cents, to $54.90, and Vornado shares rose $1.11, to $125.76.

 

By close of business Friday, the shares were at $55.22.

 

Meanwhile, as Vornado’s group plots its next move, Blackstone is busy lobbying in the courts of shareholder opinion:

 

Blackstone says its offer has advantages over the Vornado bid aside from price. It is all cash, —

 

Cash is good, but as Vornado is highly liquid, stock is not fundamentally inferior, especially as (I think) a stock-for-stock swap may be tax-deferred.

 

— and could be completed three days after a vote by Equity Office shareholders, set for Feb. 5. If Vornado prevailed, a deal might need approval of its shareholders, analysts said.

 

Obviously a new offer would require a new shareholder vote, but that’s something within the shareholders’ control; it’s hard to see how needing a vote is a risk.

 

“Our offer is now materially superior on price, timing, form of consideration and certainty,” said John Ford, a Blackstone spokesman.

 

Kathy Shanley, a corporate bond analyst for Gimme Credit, an independent research company in Chicago, said the new offer had shifted the odds in Blackstone’s favor. “They have all their financing locked up, they could close quicker, and there’s a lot less uncertainty,” she said.

But, she added: “Vornado has said they don’t anticipate any problems, and they have some heavy hitters on their side. At some level, it all depends on who blinks first.”

 

 

I’m not blinking, are you going to blink?

 

Access to Equity’s books, as mentioned above, is very important to Vornado’s group, since their strategy clearly seeks to be value-additive through a financial transaction.  Their bid contemplates making the pieces worth more individually than as an undifferentiated whole, by disaggregating the whole and migrating the parts to companies each of which can make best use of its piece:

 

Vornado has said that if its bid is successful, it [Vornado — Ed.] will retain the Equity Office buildings on the East and West Coasts, including the Verizon building at 42nd Street and the Avenue of the Americas in the red-hot Midtown Manhattan market.

 

Starwood — whose chief executive, Barry S. Sternlicht, founded the Starwood Hotel and Resorts chain — and Walton Street Capital would take Equity Office buildings in markets like Miami, San Jose and Seattle, where real estate values are expected to rise in the next couple of years. Neil G. Bluhm, the president of JMB Realty, a Chicago development company, is a co-founder of Walton Street.

 

 

“Okay, Vornado, now you get all the trophy properties, and you, Starwood, get the high cash flow deals.”

 

Thus the company with the cheapest capital (Vornado) gets the properties with the most stable yield, and the company with value-additive capacity (Starwood/ Walton) gets those where real estate plays are possible.

 

That potential disaggregation is something to note — when large conglomerates are undervalued, their acquisition almost always leads to redistribution and quite possibly transformation at the property level.

 

Yet, though we have concentrated on the two players, there’s a third whose maestro may just be playing them both:

 

I can have so much more fun with two of you …

 

Barry Vinocur, the editor of REIT Wrap, a daily newsletter about real estate investment trusts … said Mr. Zell and his investment bankers had done a “masterful” job of steering the acquisition process …

 

Let us hypothesize that:

 

·         Mr. Zell realized the public markets were undervaluing Equity Office relative to the properties’ best value. 

·         Because of his personal strong identification with Equity Office, few could imagine him simply cashing out.

·         As a result, he could not get Equity Office on the big private-equity firms’ radar screens.

 

Can’t see Equity Office anywhere there

 

What to do?

 

Get someone to make a bid, any bid,

 

 

so as to attract attention of the observant voracious herd, and encourage them to stampede:

 

… by setting the breakup fee low enough so that other bidders would enter the contest.

 

We’re off to bid on Equity!

 

 

“This is chess at its highest level,” [Mr. Vinocur] said.

 

 

 

Now, that is chess at the highest level

 

Not the two-player game of chess, Mr. Vinocur, but poker, which accommodates three (or more?) players:

 

Again I ask the question, Who is playing whom?

 

You think I can’t charm two private-equity snakes at once?

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