Vornado Under Pressure To Sweeten Its Bid For Office Landlord

How high is too high?

In what is already the largest buyout battle ever, Vornado Realty Trust is being pressured to sweeten its counteroffer for Equity Office Properties, the nations largest office landlord, and pay more of it in cash and less in stock.

In public statements yesterday, Equity Office reaffirmed its support of its proposed acquisition by the Blackstone Group. But it also postponed a vote next week on the Blackstone deal from Monday to Wednesday, ostensibly to give shareholders more time to weigh the Vornado bid.

In its statement, Equity Office said that Vornados $41 billion offer is 1 percent higher than Blackstones but fails to adequately compensate Equity Office shareholders for the increased risk.

The current offer of 45 percent in stock and the balance in cash would set off a vote by Vornado shareholders, delaying completion of the transaction, and would not provide compensation for Equity Office shareholders if the deal fell through.

Blackstone, a private equity company, has agreed to an all-cash deal of $54 a share and promised to complete the purchase within days of the shareholder vote.

But real estate specialists said a new bid from Vornado could come as early as this weekend. Jonathan D. Gray, the Blackstone senior managing director who heads the firms real estate group, canceled plans to celebrate his 37th birthday by attending the Super Bowl in Miami with his family.

Blackstone has said that it will not try to top Vornados offer, but real estate specialists are skeptical. I dont think anybody believes them, said Keven S. Lindemann, the director of real estate for SNL Financial, a research company in Charlottesville, Va. If they could close the deal at $54.50, do you think they would raise their offer?

If Vornado prevails, it would have to pay a $500 million breakup fee to Blackstone.

Whatever the final price, the bidding war for Equity Office has already signaled a major transformation in the way real estate is priced. In a report, Mike Kirby of Green Street Advisors, a company in Newport Beach, Calif., that specializes in REITs, described a troubling trend in which skyrocketing real estate prices for office buildings are based on the assumption that rents will rise at a faster pace than has normally been the case.

Unfortunately, things never seem to play out this way in the real world, especially in the office sector, he said.

But in a phone interview, Mr. Kirby said that Equity Office might be an exception. He said the Equity Office portfolio, which consists of 543 buildings, has not been well managed, leaving an opportunity for a new buyer to squeeze out more revenue.

People who bought properties from Equity Office have been delighted with the upside they found, Mr. Kirby said. You never hear that said about Boston Properties or SL Green, referring to two other real estate investment trusts that specialize in office buildings.

Mr. Kirby said he would not rule out the possibility that Steven Roth, the chairman and chief of Vornado, would persuade Equity Office shareholders — many of whom also hold large positions in his company — to turn down the Blackstone bid. Several institutional shareholders have said they prefer the Vornado bid.

He said there was little risk that Vornado shareholders would vote against the acquisition of Equity Office. Im confident the Vornado shareholders will approve anything Steve wants to do, Mr. Kirby said.

In the last five years, Vornado has had total returns, including dividends, of 270 percent, compared with 184 percent for the Morgan Stanley REIT index, the company said in documents filed with the Securities and Exchange Commission.

The company said it craved Equity Office because it owns an irreplaceable portfolio of trophy-quality assets amassed over several decades, including such buildings as 60 State Street in Boston and One Market Street in San Francisco.

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