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Equity Office May Be in Play

Blackstone Could Face
Threat to $20 Billion Bid
As Rivals Appear to Circle

By DENNIS K. BERMAN and JENNIFER S. FORSYTH
January 11, 2007; Page A3

Expectations were building last night that rival bidders might soon materialize to challenge the $20 billion buyout of Equity Office Properties Trust by Blackstone Group.

Top real-estate and private-equity investors were buzzing that a competing offer could come within a matter of days, possibly from an investment team led by real-estate maven Barry Sternlicht of Starwood Capital Group Global LLC and Neil Bluhm of Walton Street Capital. The two were seriously considering an offer last night, said one person briefed on their plans. The two still haven't completed financing for an offer. One possible funding source could be Cerberus Capital Management, a New York-based financial conglomerate, people familiar with the matter said.

A competing bid would set off what would be the most high-stakes and high-profile bidding war since the contest for RJR Nabisco nearly two decades ago. And it would be a potent indicator of the intensity of the competitive rivalry to buy companies. So far, buyout firms have observed an unstated gentleman's agreement not to top, or "jump" in Wall Street parlance, signed merger deals. But real-estate firms aren't party to that understanding.

The interest comes at a time when the debt markets are happy to throw money at mega deals. Borrowers have been able to attract capital at cheap rates, and what they can borrow as a percentage of the total value of assets is also high. Moreover, any buyer would likely split off some of the trophy assets to help pay for the deal -- part of Blackstone's plan.

One major impediment to a rival bid are the matching rights enjoyed by Blackstone that allow the firm to match any price offered by a rival. A rival would also be under time pressure, given that the Blackstone deal is expected to close within three weeks.

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• Blackstone Reaches Pact to Buy REIT³
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• Graphic: Private Equity's Banner Year⁵

Measured by current rental income, Blackstone's offer for the country's largest office-building owner and manager is already richly valued at some $36 billion, a figure that includes $16 billion of debt. But by at least one other important measure -- the price needed to replace the buildings in Equity Office's portfolio -- the deal doesn't look impossible to top.

A spokeswoman for Equity Office declined to comment. A spokesman for Mr. Sternlicht declined to comment. Mr. Bluhm didn't return calls for comment. Mark Neporent, Cerberus's chief operating officer, said that the firm "had no intention of submitting a bid." But Cerberus would be willing to provide debt financing to bidders.

Samuel Zell, Equity Office's founder and chairman, said in a previous interview with the Journal that it agreed in its negotiations with Blackstone not to seek competing bids. But he said a process was in place for the board to consider unsolicited offers.

Until the past few days analysts were unsure whether any bidders would be willing to go above the $49.50 per share needed to top Blackstone's price and cover the termination fee. Blackstone's offer was an 8.5% premium to the price of EOP's closing price on the day prior to the merger announcement on Nov. 20. And Blackstone's price was a 7.2% premium over Equity Office's net asset value of $45.25 per share estimated by Green Street Advisors, a Newport Beach, Calif., research firm.

Equity Offices' proxy filed to the Securities and Exchange Commission on Dec. 14 stated that Blackstone originally wanted a termination fee of $275 million, which was negotiated down to $200 million. Green Street Advisors described the termination fee as "modestly lower than we would have expected" and pointed out that in another recent deal involving another REIT, SL Green Realty Corp., the fee was about 3% of the initial value.

Write to Dennis K. Berman at dennis.berman@wsj.com⁶

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