Private Equity M&A
2006 YTD $349B
2005 $119B
+193%
Blackstone Reaches Pact to Buy REIT on a Banner Day for Deals [WSJ]
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 North America's largest copper producer, marks a huge long-term bet that metals prices will remain strong. Freeport, which is based in New Orleans, said it pursued the deal to gain the scale it needs to compete among other miners for equipment and prospects amid increased Chinese demand for commodities and high prices. The combination continues a recent streak of big-ticket mining deals, as the industry scrambles to secure new production and mine developments.
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 Russia's OAO Severstal earlier this year to acquire Arcelor SA of Luxembourg, the world's second-largest steelmaker by output, which was fighting off a hostile bid by larger rival Mittal Steel Co. Mittal eventually topped Severstal and forged a friendly deal with Arcelor.
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 U.S. finance. Amid their euphoria, however, there are signs the three-year-old wave of mergers could be headed for some trouble.
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 AIG SunAmerica Center in Century City, Calif., the Civic Opera building in Chicago and the Rowes Wharf building in Boston. The property company is organized as a real-estate investment trust, or REIT. REITs are public companies that acquire and manage real estate and pay no corporate income taxes if they pay out 90% of their net income as dividends.
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. |
