Vornado Raises Offer For REIT

The bruising fight over Equity Office Properties, the nations biggest office landlord, has entered its final round. But neither side has managed to land a knockout blow.

Vornado Realty Trust appeared to have the edge yesterday as it raised its bid to $56 a share in cash and stock, or $41 billion, topping a bid of $54 a share from the private equity giant Blackstone Group.

But the lower offer may still win.

Vornados improved offer came up short of expectations that it would be $57 a share. And shares of Equity Office fell 40 cents yesterday, to $55.15 — higher than Blackstones bid, but lower than Vornados, perhaps in a sign that investors expect Blackstone to raise its offer again.

Equity Office, the real estate investment trust run by Samuel Zell, will decide this weekend which offer to accept.

Vornados offer, which includes assumption of $15.3 billion in debt, has some risks. While worth $2 a share more than Blackstones offer, it consists of $31 in cash and $25 in stock, which could fall depending on market conditions. (Blackstones offer is all cash.) To protect against a decline in the stock, Vornado has included a collar that protects the value of its offer as long as Vornados shares remain between $115 and $135 a share. The shares surged 2.8 percent yesterday, to $125.74.

Vornados offer also comes with a time risk: it could take several months to be completed and requires shareholder approval.

A deal with Blackstone, which had struck a deal last year to buy Equity Office at $48.50 a share before raising its bid in response to Vornados, could be completed by Feb. 8.

Blackstone said yesterday that its offer was still superior to Vornados. Many analysts agreed.

This is not enough to entice shareholders to wait the extra two to three months, Sri Nagarajan, an analyst with RBC Capital Markets, said of Vornados offer in a note to investors. We expect the $54 all-cash Blackstone offer to be deemed superior by the weekend.

Scott OShea, an analyst at Deutsche Bank, said, We dont see this as a knockout bid; some participants were looking for $57.

Vornado, the giant real estate investment trust run by the shopping mall magnate Steven Roth, may have one major advantage over Blackstone regardless of price. Some of the biggest shareholders of Equity Office are real estate investment funds that hold big stakes in the company, like Cohen & Steers. Because most REIT investors have to keep all of their assets invested in REIT funds, some may prefer to accept Vornados offer because they would otherwise have to reinvest the cash generated by a sale to Blackstone in shares of companies like Vornado anyway.

The Vornado offer is superior and potentially better than cash, James Corl, chief investment officer for Cohen & Steers, Equity Offices biggest shareholder, told Bloomberg News. If Blackstone comes back at $58, well give them a big hug. Right now, well give Vornado a big hug.

At this point in the bidding contest, however, it is unclear how much of the shareholder base of Equity Office is still made up of REIT investors and how much has been turned over to hedge funds and arbitragers. There are some indications that many REIT investors have already sold their shares in Equity Office.

Vornados bid is somewhat different from its original bid of $52 a share two weeks ago. When it made its first bid, it did so as part of a consortium that also included the private equity firms Starwood Capital and Walton Street Capital.

Yesterdays bid, however, appeared to be made by Vornado on its own, with the possibility that it would sell about $10 billion of Equity Offices assets to Starwood and Walton Street.

The chairman of Vornado, Mr. Roth, has so far missed out on the flurry of mergers that have swept through the real estate investment trust industry.

Last fall, Mr. Roth proposed to Mr. Zell of Equity Office that they merge their companies. But after a series of missteps, Blackstone swooped in and reached a deal to buy Equity Office for $48.50 a share.

Outraged, Mr. Roth assembled a group of investors to make a counteroffer. Vornado and its partners, Starwood Capital and Walton Street Capital, told Mr. Zell on Jan. 17 that they would top the Blackstone proposal with a cash-and-stock offer of $52 a share.

Equity Office opened its books and gave the Vornado group until Wednesday night to make a formal offer. Without waiting for the Vornado offer, Blackstone raised its offer last week to $54 a share, an 11 percent premium over the price it had agreed to pay in November.

On Sunday, Institutional Shareholder Services, a proxy advisory company, recommended that shareholders accept the Blackstone bid.

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