Barbarians, the gathering?
Scarcely had I finished writing my recent followup post about Blackstone’s tender offer for Equity Office than a rival suitor had leapt into the fray. As the New York Times reports:
With the unprecedented amount of cash sloshing around in private equity’s pockets, it may have been inevitable, but the gloves have come off in buyouts.
Hostile bids just aren’t cricket, old boy.
Sloshing in pockets, gloves coming off — block that metaphor!
Late Wednesday [1/17/07 — Ed.], a group of investors offered $38 billion for the nation’s largest office landlord, setting off the biggest buyout battle since the landmark fight for RJR Nabisco nearly two decades ago.
Cue the inevitable Barbarians references!
Jonathan Pryce as Henry Kravis
The upstart bid –
‘Upstart’? Since when is thirty-eight billion upstart?
– for Equity Office Properties, the real estate investment trust that was founded by Samuel Zell, tops a $36 billion deal that Equity Office had reached with the Blackstone Group in November. Either bid would win the crown as the largest buyout ever, surpassing last summer’s $33 billion deal for HCA.
Why is this story, delicious though it promises to be, relevant to housing and affordable housing?
It’s gonna be tasty …
Because the barbarians are moving through the asset classes.
Apartments next!
HCA is a hospital chain; Equity Office is office buildings. In terms of operational and investment characteristics, apartments are midway between the two.
The battle for Equity Office pits some of the most powerful and colorful financiers against each other. Blackstone is controlled by Stephen A. Schwarzman, who has created one of the largest, if not the largest, private equity firms in the nation.
The rival group includes Steven Roth of Vornado Realty Trust, once the king of New Jersey strip malls; Barry Sternlicht of Starwood Capital, who created the hotel chain and then left the company after a falling-out with its board; and Neil Bluhm, a Chicago real estate mogul who backed Barack Obama’s successful run for the United States Senate. Mr. Sternlicht worked for Mr. Bluhm as a young analyst in the late 1980s.
It’s certainly hard to call that group, which includes a couple of billionaires, ‘upstarts.’ ‘Hostile,’ perhaps, but not upstarts.
Captain, I am sensing economic hostility
The offer from the Vornado group is the latest sign that the cozy world of buyouts is becoming less genteel, The New York Times notes. Even the name that the new consortium has given itself — Dove Parent — is apparently a mocking reference Blackstone-created buyout entity, Blackhawk.
Can Dove beat Hawk?
In recent years, the giants in private equity seemed to have avoided stepping on each other’s deals while banding together on others. So much so that private equity firms have come under scrutiny from the Justice Department, which has started an inquiry into whether private equity firms have broken antitrust laws.
I wondered about that — particularly when the companies being acquired are publicly traded, with their managers held to the highest standard of fiduciary duty.
Do your fiduciary duty by getting the highest price.
And few public companies have shown a willingness to compete with private equity’s war chest.
That’s a more practical reason; the key to private equity is the ability to deploy very large sums quickly. As my favorite businessman Auric Goldfinger explained, in what might be the private equity manifesto:
“My treasure of gold is like a compost heap. I move it here and there over the face of the earth and, wherever I choose to spread it, that corner blossoms and blooms. I reap the harvest and move on.”
Goldfinger, page 135
“Goldfinger, do you expect me to withdraw my bid?”
“No, Mister Bond, I expect you to die!“
Such appetites must be satisfied by large meals, and the globe right now has too much money chasing too few mega-beasts:
Private equity firms have been gobbling up publicly traded companies at a record pace, spending some $660 billion last year. The battle for RJR Nabisco in the late 1980s showed that bidding wars can get out of control.
‘Bidding wars’ is simply a journalist’s term for a competitive auction. Journalists often have the notion — which I had in my younger days — that there is such a thing as the ‘correct’ price, an abstract quantity above which a purchase was demonstrably imprudent. Over the years, I’ve learned that it’s all about rates and yields. As we saw with Stuyvesant Town, you don’t know what a thing will sell for until you offer it for sale.
While some powerful shareholders have argued since the get-go that Blackstone’s offer was too low, the battle may not be tilted in favor of the new bidders, according to The Times.
For one, 40% of their $52-a-share offer is in shares of Vornado, at an unspecified ratio [Presumably, based on recent closing prices for Vornado — Ed.], compared with Blackstone’s all-cash bid.
That may cut both ways. Cash is taxable; under the right circumstances, shares exchanged may be tax-deferred.
And Blackstone has already completed many of the steps needed to close the deal.
Irrelevant — I’m sure the buyers can complete the same steps briskly if they need to.
In addition, Blackstone has the right to match any rival offer.
Now that is a potential roadblock —
Nobody kumz in heer
Or is it? Clearly the original parties — Equity Office and Blackstone — intended it should be so, and spent some time anticipating countermeasures they should adopt to prevent another buyer from cutting in.
Equity’s granting of such favors to Blackstone is not ipso facto a bad thing; Equity Office may have used the right-to-match provision to encourage Blackstone to raise its original bid.
Yet Dove Parent’s move is a flanking action.
We’re moving our tender offer into position.
How can Blackstone match an offer, a portion of which is shares in a specified REIT?
As we watch this little melodrama play itself out, keep asking this question:
Where Equity Office goes, can Equity Residential be far behind?
