Equity Office: A Good Deal?

(Updated) Equity Office shareholders yesterday overwhelmingly approved the $55.50 per share buyout offer from The Blackstone Group, thus cementing the largest-ever LBO at around $39 billion (including around $16 billion in assumed debt). I wrote a few days ago that Blackstone might be better off losing the deal if it were able to collect the ridiculous $720 million breakup fee it negotiated – and lots of Blackstone LPs wrote me in agreement – but then Vornado bailed and left Blackstone as the de facto winner.

So do I now stand corrected, considering that: (A) Blackstone was not required to raise its bid beyond Vornado’s $56 per share; and (B) Blackstone reportedly already has agreed to sell around $7 billion of Equity Office’s New York City properties. Or how about the fact that Blackstone is putting in less than $4 billion of its own dollars and reportedly has “agreed” to pay itself a hubris acquisition fee worth around $200 million? (Update: A reader says that blackstone’s Tony James put the fee closer to $400 million, during a speech last week at Harvard Business School’s VC/PE Conference)

The answer is “probably” (how’s that for taking a stand?). The reason for my hedge is that it ultimately depends on whether or not Blackstone ever really thought it could acquire Equity Office for its original bid. If so, then this deal is not the best use of Blackstone’s money. It would have done better to transact a series of smaller buyouts with more Blackstone-like return expectations. But the fact is that Blackstone kept responding to each Vornado raise as if it were holding pocket aces. In other words, its real return expectations were based upon a price much closer to $55.50 per share than to $48.50 per share.

By the way, today’s NY Times has some great backstory to how the auction began…