Takeover Battle Ends With Sale Of Big Landlord

Roses are red, violets are blue; I hear a rumor, is it true?

Richard Kincaid, the chief of Equity Office Properties, announced the merger with Blackstone Wednesday. Blackstone beat Vornado’s offer.

Jonathan D. Gray of Blackstone.

That strained line of poetry set off the fiercest buyout battle since the epic contest for RJR Nabisco in the late 1980s, a struggle that was captured in the book Barbarians at the Gate.

The line, written by the real estate mogul Samuel Zell in an e-mail message last month, invited a rival bid topping a $48.50 a share offer for his Equity Office Properties, the biggest office landlord in the nation, with buildings in Manhattan, Chicago, Atlanta and other major cities.

The reply: Roses are red, violets are blue. I love you Sam, our bid is 52.

The rhyme was true, but the comeback was not good enough.

The private equity giant Blackstone Group, which was the initial bidder, won the bidding war for Equity Office yesterday with an offer of $55.50 a share, or $39 billion.

The takeover battle, perhaps the most entertaining of recent years because of the big financial players — and big egos — involved, was called New York at the Gate, because it pitted two very different New York financiers against each other: Stephen A. Schwarzman of Blackstone, the leading figure in Manhattans financial and charity circuit in recent years, and Steven Roth of Vornado, the onetime strip mall king of New Jersey.

The deal for Equity Office encapsulates two of the hottest trends in deal-making: the wave of capital flooding into commercial real estate and the growing power of private money.

While residential real estate has slowed, commercial real estate, office buildings in particular, looks more attractive as the market finally shakes off the effects of the burst technology bubble in 2000. Many investors expect office vacancy rates to continue to decline in the next couple of years, with a corresponding rise in rents.

And private equity firms like Blackstone have been among some of the most aggressive investors in commercial real estate. These firms have accumulated huge war chests: even now Blackstone is raising a new $10 billion real estate fund. The surge in buyouts — which accounted for a fifth of the record $3.8 trillion in deals last year — shows no sign of slowing.

The Equity Office deal is the biggest leveraged private equity buyout ever, surpassing last summers $32 billion deal for the hospital chain HCA, which itself was the first to surpass the previous high-water mark, the $30 billion deal for RJR Nabisco.

Memories of that earlier contest were much on the minds of the bidders for Equity Office. At internal meetings when Blackstone would debate how to counter Vornado, Mr. Schwarzman would remind his bankers: We dont want to be K.K.R., referring to the buyout of RJR Nabisco that turned out a disappointment to Mr. Schwarzmans archrival, Henry R. Kravis of Kohlberg Kravis Roberts & Company.

We need to remember this is just another deal, Mr. Schwarzman said, according to people close to the firm.

Blackstone had a huge incentive to make the deal. The firm will pay itself an acquisition fee worth about half of 1 percent of the deal — the equivalent of about $200 million just for winning the auction, no matter how well the investment turns out. (Blackstone is not alone. Its advisers, Goldman Sachs and the law firm Simpson Thacher & Bartlett, will also earn millions of dollars in fees.)

And Blackstone will waste no time disposing of some of its newly acquired assets, taking advantage of the hot Manhattan real estate market. All but one of Equity Offices eight buildings in New York — the Verizon building at 42nd Street and the Avenue of the Americas — are expected to be sold to Harry Macklowe for about $7 billion, some simultaneously with Fridays closing.

Blackstone was a winner, but Mr. Zell, 65, a raspy-voiced tycoon with a penchant for doggerel, music boxes and Ducati motorcycles, was an even bigger one. Even his detractors are saying he ran a masterly sale, encouraging a bidding war that drove up the price for Equity Office by $3 billion. Mr. Zell stands to make more than $130 million on his shares and options in the company.

When Sam steps into the prime decision-making role, said Timothy H. Callahan, a former chief executive of Equity Office, no one is better able to be strategic. Thats what shareholders have seen in the past, and thats why he will continue to wear the mantle as one of the leading lights of real estate.

It may have helped that Mr. Zell knew the bidders so well. As he said in an interview yesterday, This was like a family outing in the Turkish bath.

The son of Jewish immigrants who fled Poland hours before the Nazi invasion, Mr. Zell grew up in Chicago. He showed an entrepreneurial streak at an early age, buying issues of Playboy magazine from newsstand vendors and selling them at a marked-up price to his friends.

Mr. Zell first made his fortune in the 1970s by buying distressed real estate and fixing it up, earning him the nickname the grave dancer. In contrast to real estate moguls like Donald J. Trump, he shied away from trophy buildings, preferring strong financials to prestige. With his branding and financial acumen, he was one of the first to transform commercial real estate from a local affair to a national business.

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