Equity Office battle

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Sam Zell is giving a lesson on how to sell a business. Directors at pharmacy benefits manager Caremark should take note.

In November, Mr Zell, chairman of Equity Office Properties, got the best bid he could from Blackstone after shopping the company around. But he was always looking for more. By negotiating a $200m break fee, tiny in the context of a $36bn deal, he sent a clear welcome signal to other potential suitors. When rival real estate group Vornado was prodded into bidding, he invited them straight in to look at EOP’s books (contrast that with Caremark’s board, which seems to be doing its best to avoid a bidding war that could push up value for shareholders).

Mr Zell’s strategy has forced Blackstone to raise its bid by 11 per cent, giving the private equity group the dubious honour of breaking its own record for the biggest leveraged buyout ever. Can the battle go even further? Vornado and its partners will struggle to top $54 a share. Blackstone has the slight advantage of an increased break fee, now $500m. It has a firm bid which can close in weeks, while Vornado has to renegotiate with several partners to decide whether to continue. Finally, Blackstone is offering cash. Vornado, which is partly bidding with equity, will have to offer a decent premium.

The price for EOP is starting to push into new territory for this sort of asset mix. But commercial real estate values are still rising. There should be ample room to raise rents over time and improve EOP’s operations. Meanwhile, debt financing remains cheap and plentiful.

EOP’s shares, at $54.80, are factoring in the prospect of more action. That partly reflects the hopeful logic that Vornado would not have entered the battle so late with nothing more in its pocket. But in such a hot market, investors could yet be proved right.

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