Barbarians, the aftermath: Part 4, the coda
[Continued from previous Parts 1, 2, and 3.]
[Previous posts on the proposed takeover here (newest), here, here, here, here, here, here, here, and here (oldest).]
So the deal has closed. Who won?
At least somebody won
Ultimate winner: Equity Office and Sam Zell. A year ago at this time, Equity was trading for $29.25, and last week it sold for $55.50, a phenomenal 90% appreciation in twelve months. Moreover, even after Blackstone’s opening bid ($48.50), the appearance of a breathless and belated second suitor drove its price up another 14%, with no further risk by the Equity shareholders.
As Malcolm said of Cawdor, “Nothing in his life became him like the leaving it,” and so we must judge Equity’s management less by the stock’s appreciation during their period of REIT status and more by the magnificent exeunt they wrote for themselves.
Macbeth as Mobutu Sese Seko
It’s evident that selling Equity Office has been Mr. Zell’s top priority for some time, going back at least to last summer:
In an interview with The Wall Street Journal last summer, Mr. Zell emphasized that EOP had no defenses, such as a poison pill, that would keep a bidder from approaching him.
No Cleopatra’s asp here.
I’m vulnerable, I’m helpless, come and ravish me!
If the offer maximized shareholder value, he had an obligation to consider it. “I believed that the moment I took money from the public,” he said.
Over 18 months, five firms approached EOP about a possible merger, according to the shareholder proxy issued Dec. 29. (Only Blackstone was identified by name. Vornado was called “Company C.”)
Vornado executives argued that the two companies could enhance the best in each other, perhaps in a stock-for-stock merger, the proxy said. Equity Office would bring its vast portfolio; Vornado would bring its powerful balance sheet and cachet with Wall Street, according to sources close to the negotiations.
“Your P, my E — yes, yes, yes!“
Early in the saga, when Vornado appeared on the horizon, I speculated that the real maestro in the story was Sam Zell, legend-in-his-own-time founder of Equity Office, for orchestrating a scenario whereby financial testosterone would start a bidding war:
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 …
The Journal offers more tidbits as to how fair maiden Equity cheered on its champion, with exhortations and blandishments:
‘Go shop” provisions have become a common feature of the LBO landscape. These clauses are meant to sound shareholder-friendly because they lock in a bidder while allowing a board to beat the bushes for others. So how to explain the extra $3 billion that EOP extracted for shareholders after agreeing to a “no shop” with Blackstone in November?
Although Mr. Zell and company may have agreed not to be a shop-per, nothing precluded them from being a shop-pee.
As the jargon implies, a “no shop” limits boards from soliciting rival offers. So “go shops” must be better for shareholders, right? Not so fast. Two of the biggest buyouts of the past year, of hospital chain HCA and chip maker Freescale, included “go shop” clauses. And in neither case did competitors emerge.
This is partly why investors regard “go shops” with suspicion. They see it as a form of legal cover for independent directors worried they will be perceived as favoring managers buying out the companies they run on the cheap. But that leaves the question of how EOP, despite a “no shop,” got such a robust battle going between Blackstone and Vornado.
Three obvious reasons stand out:
- Mr. Zell had spent months and months advertising his availability.
- Blackstone didn’t bid enough to pre-empt the entire field..
- Mr. Zell dangled a low breakup fee to coax Vornado in.
Rather more critical to the outcome was the size of the fee that anyone wanting to top Blackstone’s first bid would have had to pay. At the outset, EOP insisted on just a 1% break fee, well below the industry standard of 3%. As a carrot to Blackstone, EOP ratcheted that up as the private-equity firm raised its offer.
Evidently the Economist agrees with me:
It was a humdinger of a battle. Sam Zell, EOP’s founder, had talked to Vornado about a possible tie-up last summer. In November, however, after those negotiations faltered, Mr Zell agreed to sell to Blackstone for $48.50 a share, almost $20 more than the stock had been worth only months earlier. Shrewdly, he insisted on keeping a low “break-up fee”—payable to Blackstone if it lost out to another suitor. This made it easier for other bidders to come in.
Mr Zell has not always been so clever: he overpaid for a cluster of
Another three billion out of that one lemon?
As the Journal observed., the seller is always happy:
For Equity Office founder and Chairman Sam Zell, who chatted with his longtime friend Mr. Roth after the shareholder vote, the deal represents a big payday. Factoring in stock options and other payments, Mr. Zell stands to make more than $800 million from the sale, according to proxy statements.
As for Blackstone, they may be right.
Some victories aren’t worth winning, right Pyrrhus?
And finally, the AHI punch line. The last time I covered a billion-dollar battle,
[Previous posts on Stuyvesant Town include 1, starting gun, 2, opening bets, 3, what’s at stake, 4, paging the cavalry, 5, must the public pay?, 6, orchestra warms up, 7, unpublished score, 8, hidden free riders, 9: selling banns, 10: resident imperatives, and 11: with a whimper.].
Everybody feared and projected that the buyers would be motivated even more strongly than the previous owner to do everything possible to boost Net Operating Income; in Stuy Town’s case, there was and is an obvious path, ferreting out rent control’s hidden free riders and bringing those apartments to market. Something similar is likely in Equity Office. As reported in the Wall Street Journal:
Blackstone probably also believes it can generate higher returns from the acquired properties than EOP did.
New landlords raise rents faster. Right or wrong, they step on the gas pedal.
Higher rents … and step on it!
As I noted earlier in this extensive post, even though offices are thought safer than apartments, apartment leases are easier to raise (yearly) and an apartment building (unlike an office) never goes fully vacant. Further, increasingly we see cities as adult residential playgrounds, with conversions of retail, commercial, and office space into apartments and condos for multi-housing families and others. Hence:
Where Equity Office has gone, can Equity Residential (or AIMCO) be that far behind?
Apartments next?
