Blackstone Outmaneuvers Vornado to Buy Equity Office Properties

question 138

Essay

Blackstone Outmaneuvers Vornado to Buy Equity Office Properties
Reflecting the wave of capital flooding into commercial real estate and the growing power of private equity investors, the Blackstone Group (Blackstone) succeeded in acquiring Equity Office Properties (EOP) following a bidding war with Vornado Realty Trust (Vornado). On February 8, 2007, Blackstone Group closed the purchase of EOP for $39 billion, consisting of about $23 billion in cash and $16 billion in assumed debt.
EOP was established in 1976 by Sam Zell, a veteran property investor known for his ability to acquire distressed properties. Blackstone, one of the nation's largest private equity buyout firms, entered the commercial real estate market for the first time in 2005. In contrast, Vornado, a publicly traded real estate investment trust, had a long-standing reputation for savvy investing in the commercial real estate market. EOP's management had been under fire from investors for failing to sell properties fast enough and distribute the proceeds to shareholders.
EOP signed a definitive agreement to be acquired by Blackstone for $48.50 per share in cash in November 2006, subject to approval by EOP's shareholders. Reflecting the view that EOP's breakup value exceeded $48.50 per share, Vornado bid $52 per share, 60 percent in cash and the remainder in Vornado stock. Blackstone countered with a bid of $54 per share, if EOP would raise the breakup fee to $500 million from $200 million. Ostensibly designed to compensate Blackstone for expenses incurred in its takeover attempt, the breakup fee also raised the cost of acquiring EOP by another bidder, which as the new owner would actually pay the fee. Within a week, Vornado responded with a bid valued at $56 per share. While higher, EOP continued to favor Blackstone's offer since the value was more certain than Vornado's bid. It could take as long as three to four months for Vornado to get shareholder approval. The risks were that the value of Vornado's stock could decline and shareholders could nix the deal. Reluctant to raise its offer price, Vornado agreed to increase the cash portion of the purchase price and pay shareholders the cash more quickly than had been envisioned in its initial offer. However, Vornado did not offer to pay EOP shareholders a fee if Vornado's shareholders did not approve the deal. The next day, Blackstone increased its bid to $55.25 and eventually to $55.50 at Zell's behest in exchange for an increase in the breakup fee to $720 million. Vornado's failure to counter gave Blackstone the win. On the news that Blackstone had won, Vornado's stock jumped by 5.8 percent and EOP's fell by 1 percent to just below Blackstone's final offer price.
-What could Vornado have done to assuage EOP's concerns about the certainty of the value of the stock portion of its offer?

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