Blackstone continued its push into the US commercial real-estate market on Monday by agreeing to acquire Equity Office Properties Trust in a deal worth $36bn including debt, marking what would be the largest-ever private equity transaction.
The proposed acquisition follows months of speculation over the future of EOP, part of the property empire started by Chicago-based Sam Zell, at a time when the domestic office market is recovering from a prolonged slump.
EOP’s board approved the deal following a meeting late on Sunday, with completion expected in the first quarter of next year. The terms include $20bn in cash and $16bn in assumed debt and would eclipse the recently-agreed takeover of the HCA medical group as the largest ever by a private equity group.
The deal also reflects the growing audacity of cash-rich buy-out firms, which are taking over some of the largest US companies across a range of industries.
Blackstone has already spent more than $15bn this year to acquire Trizec and CarrAmerica, two smaller rivals to EOP, which has quadrupled since its formation 30 years ago to become the largest real-estate investment trust, a popular tax-efficient vehicle.
Some private equity groups and banks run property-specific funds which are becoming increasingly large in size.
Blackstone’s most recent real estate private equity fund has raised more than $4bn of equity, as has a rival fund run by Morgan Stanley. With typical leverage of three parts debt to one part equity, the funds have enormous firepower in global property markets.
EOP owns almost 600 buildings with over 100m square feet of office space across the US, but earns half its profits from five key markets – Boston, New York, San Francisco, Los Angeles and Silicon Valley – which are all in the early stages of recovery after three years of falling rents.
The company’s share price climbed to record levels last week in the wake of persistent takeover speculation and the advance of a strategic review announced earlier this year which would see it sell more than $3bn of lower-yielding properties.
The company was also reported to have held discussions about a major investment by the California Public Employees Retirement System, which has been expanding its portfolio in property, hedge funds and other alternative assets.
Blackstone’s real-estate arm is offering $48.50 a share for EOP unit, an 8.5 per cent premium over its close on Friday and 20.5 per cent above its three-month average. EOP was advised by Merrill Lynch, with Blackstone backed by Goldman Sachs, Bank of America, Bear Stearns – all of whom will provide financing – as well as its own internal team.
The Equity Office deal is the latest and largest in a string of at least 22 Reit (real estate investment trusts) public-to-private deals and mergers in the US since the start of 2005, despite Reits trading at a high level. Others to have gone private include Bedford Property Investors, CRT Properties, Centerpoint Properties, Town & Country Trust and Gable Residential Trust.
The deal could prompt the reallocation of $16bn of capital into other office Reit shares, according to analysts at UBS. James Feldman at UBS predicted that former shareholders in Equity Office could divert their money into Boston Properties, Brookfield, Maguire Properties, Vornado and SL Green, pushing up share prices.
Private-equity groups are attracted to the large and improving cash flows of commercial office owners and managers, with rents rising in key metropolitan markets all year as vacancy rates dipped towards 13 per cent.
One concern, said analysts, is the increasing pipeline of new building, notably in markets such as New York, Chicago, Washington and Atlanta.
The attraction of the commercial market contrasts with the continued wariness of private equity in listed homebuilders, despite the depressed valuations of many companies as the housing market continues its slowdown.
However, executives at a number of the large builders have predicted that buy-out groups could look to joint ventures in areas such as land purchase rather than outright acquisitions to capture potential upside when the market recovers.
HCA, the largest US hospital operator, agreed in July to be taken private by a consortium including Bain Capital, Kohlberg Kravis Roberts, and Merrill Lynch for about $33bn.
The transaction was a watershed moment, breaking the long-standing record for the largest private equity deal, sealed in 1989 when KKR bought RJR Nabisco, the food and tobacco conglomerate.
Additional reporting by Jim Pickard in London
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