Blackstone
Reaches Pact to Buy
REIT on a Banner Day for Deals
Proposed
$20 Billion Buyout
Of Big Office Landlord
Brings Tally to $52 Billion
By DENNIS K. BERMAN, JENNIFER S. FORSYTH and RYAN
CHITTUM
November 20, 2006; Page A1
The real-estate arm of private-equity
firm Blackstone Group last night reached a $20 billion deal to acquire Equity
Office Properties Trust, the nation's largest office-building owner and
manager, as Wall Street wrapped up at least $52 billion of deals on one its
biggest deal-making days ever.
If completed, the deal to take Equity
Office Properties private would be the largest such transaction in history --
and possibly the largest real-estate deal ever -- after factoring in the
company's $16 billion in debt.
Even so, it was just one of a parade of
multibillion-dollar deals expected to be announced by this morning. They
include a $25.9 billion takeover of mining concern Phelps Dodge Corp. by
Freeport-McMoRan Copper & Gold Inc.; a $3.3 billion takeover of U.S.
Trust, the private-banking arm of Charles Schwab Corp., by Bank of
America Corp.; and a $2.5 billion agreement by
Russian steelmaker Evraz Group SA's to acquire Oregon Steel Mills Inc. Last night, Wall
Street bankers were discussing the possibility of still more major deal
announcements today.
The continuing boom in deal making stems
from several factors, including a world-wide glut of capital. Having
restructured after the stock-market meltdown earlier in the decade,
corporations have built up massive war chests they can use for acquisitions.
Interest rates are also near historic lows, giving buyers ample access to the
credit they need to pull off massive transactions. Meanwhile, private-equity
firms, which seek to acquire companies and resell them at a profit, have been
showered with tens of billions of dollars by investors including pension funds,
state retirement plans and wealthy individuals.
Merger expectations across all sectors of
the economy have helped drive up the bellwether Dow Jones Industrial Average by
15% this year, a run-up that has in turn inspired more deal making. Meanwhile,
the stigma of botched marriages, such as America Online Inc.'s $160 billion
merger with Time Warner Inc., appears to have retreated for the time being.
Blackstone will pay $48.50 for each share
of Chicago-based Equity Office Properties. That represents about an 8.5%
premium to the company's closing price of $44.72, down 13 cents, in 4 p.m. New York Stock Exchange composite trading. The deal is
expected to close in the first quarter of next year.
The deal, if completed, would break the
record for "take private" transactions set earlier this year by the
recently completed buyout of hospital operator HCA Inc. for $21.3 billion, plus
$11.7 billion in debt, by a group of buyout firms and the company's founding
family. The record could be eclipsed again by year end as private-equity firms,
with their massive war chests, take aim at publicly traded companies once
considered too big or too independent-minded to be takeover targets.
Over the past year, big corporations have
mostly sat on the sidelines of the acquisition game, but yesterday's deal
making suggested they may be becoming more active. Flush with years of
accumulated cash and driven by investors eager for
growth opportunities, they are uncorking a slew of largely cash transactions.
Bank of America is expected to say it is
paying $3.3 billion for U.S. Trust, according to people familiar with the
situation. The deal would vault the giant consumer bank from also-ran status in
the increasingly lucrative business of managing rich people's money to the top
tier of private banks. While Bank of America is a colossus in retail and
corporate banking, it has been unable to top rivals J.P. Morgan Chase
& Co. and Citigroup Inc. in private banking.
Freeport-McMoRan Copper & Gold's
cash-and-stock agreement to acquire rival Phelps Dodge, which would create
Russian steelmaker Evraz
Group SA, meanwhile, is near a deal to acquire Oregon Steel Mills, the
latest step in the global consolidation that is transforming the once-moribund
industry. Russian metals companies have long wanted to play a larger role in
the industry's consolidation. Highlighting those ambitions was an agreement by
This year's huge deals have been good
news for the Wall Street bankers who arrange the transactions and expect to
enjoy what may be the largest pool of year-end bonus payments in the history of
Banks, for instance, are willing to
finance ever-larger deals with less-stringent terms and covenants. Companies
are pursuing increasingly complicated transactions, such as CVS Corp.'s
$21.3 billion agreement to purchase pharmacy manager Caremark Rx Inc.
Holders have sent shares in both companies down since the two announced their
deal on Nov. 1. And the prices paid by private-equity acquirers lately have
been significantly higher than over the past three years.
The real-estate sector -- which has been
home this year to $264 billion worth of deals, up nearly 50% from 2005,
according to data from Thomson Financial -- has been one of the most fertile
for acquisitions.
Blackstone has emerged as the sector's
most formidable investor in recent years, purchasing six publicly traded hotel
groups and three commercial real-estate firms. The private-equity firm's
investment thesis for office buildings has been relatively simple: Take comfort
in the fact that office locations are expensive to replace, and expect that
corporate rents will rise as part of general economic growth nationwide.
Its latest target, Equity Office
Properties, either on its own or through partnerships, owns more than 590
office buildings in 25 markets. Among its more notable properties are the
Speculation about Equity Office
Properties' prospects for going private has simmered since founder Samuel Zell admitted to a "flirtation" with the
California Public Employees Retirement System last spring. But some investment
bankers and analysts discounted the speculation, believing Equity Office's debt
load was too high. Even as the company has worked to reduce debt and reduce its
holdings in weaker markets, Michael Knott, an analyst with Green Street
Advisers, a real-estate research and trading firm, placed the chances of Equity
Office being bought at only 20% as recently as two weeks ago.
Mr. Zell isn't
expected to remain an active part of the company, people familiar with the
matter said. Equity Office said last night that neither management nor its
trustees are participants in the buying group. And the sale could reduce Mr. Zell's influence in the REIT business. Equity Office
Properties was the first real-estate company in the Standard & Poor's
500-stock index.
That Equity Office Properties would turn
its back on the equity markets is in itself momentous,
as Mr. Zell had championed the concept of publicly
traded real-estate companies. He evangelized for the REIT structure as a way to
make real-estate a liquid investment and increase transparency in what had been
a notoriously behind-closed-doors business.
That lack of disclosure helped contribute
to a broad industry collapse in the late 1980s and early 1990s, costing the
government billions of dollars to bail out crippled savings and loans and
helping tip the economy into recession. Mr. Zell
argued that making real estate public would help the boom-and-bust industry
moderate its cycles. More crucially, Mr. Zell also
promoted REITs as a better way to gain access to
capital financing, the life-blood of real-estate owners and developers, than
private deals.
But with the massive amounts of private
capital that are available to real-estate developers and the alternative
financing methods, such as commercial mortgage-backed securities,
that have boomed in the last five years, real-estate companies have
become less enamored of public markets.
Equity Office Properties, which went
public in 1997, has been the most prominent office-building REIT, but hasn't
been much loved by Wall Street analysts. For years, the company argued that a
big REIT could benefit from economies of scale across a nationwide market, even
as some smaller REITs outperformed it by exploiting a
more intimate knowledge of just a few markets. Over the past five years, Equity
Office Properties has underperformed its office peers and the real-estate
sector as a whole. Its five-year return, including dividends, is 108.6%,
compared with 149.5% for all office REITs, according
to SNL Financial. The average for all REITs is
182.8%.
In an interview last summer, Mr. Zell pointed out that Equity Office Properties had no
barriers such as a shareholder rights plan -- or so-called poison pill -- to
prevent it from being sold, and that he would consider any offer at any time.
"We are very shareholder friendly. We always do whatever is in the best
interest of shareholders," the REIT's chief
executive, Richard Kincaid, said in a conference call with analysts last month,
in response to a question about the possibility of a takeover.
In the past few years, Mr. Zell, though remaining chairman,
has ceded day-to-day responsibility for running the company to Mr. Kincaid. And
much of his interest and time has been more focused on his private pursuits,
particularly his international investments. Nonetheless, he remained the face
of the company and was in great demand at REIT industry functions, where a
younger generation of real-estate moguls waited to hear his latest ideas about
the state of the industry. As of September, Forbes ranked him as the 52nd
richest American, with a net worth of $4.5 billion.
Merrill Lynch & Co., and law firm Sidley Austin
are advising Equity Office. Goldman, Sachs Group Inc., Bank of America, Bear
Stearns Cos., Blackstone Corporate Advisory, Morgan
Stanley and law firm Simpson Thacher &
Bartlett are advising Blackstone. Goldman, Bank of America and Bear Stearns are
leading the financing.
Write to Dennis K. Berman at dennis.berman@wsj.com1 and
Ryan Chittum at ryan.chittum@wsj.com2
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