Sports Talk Radio Meets Real Estate

Don't Hold Back... "It looks like the [Equity Office] deal went on the cheap." That's Jonathan Litt of Citigroup dissing Blackstone's acquisition of Equity Office for $48.50 a share. (BusinessWeek, Dec 4, 2006)

Previously, "Jim Corl, Cohen & Steers' chief investment officer, said the cost of buying all the properties in the company's portfolio would value it 'in the $60 range.'" (Wall Street Journal, Nov 21, 2006)

CEO Sam Zell blasted back, "If Mr. Corl wants to make an offer and meets the various requirements of the merger agreement, he's certainly free to do so." (Wall Street Journal, Nov 22, 2006)

Wow, who knew real estate could be so entertaining? The Equity deal makes great spectator sport. But I wonder how many people understand how the deal is actually structured.

According to the Wall Street Journal, the deal totals $36 billion with $20 billion of equity (the $48.50 per share) and $16 billion of assumed debt. (Nov 22, 2006) So where is Blackstone getting the $20 billion?

Three days later the Wall Street Journal answered the question, "The Equity Office buyout will consist of $29.6 billion of debt and $3.2 billion from Blackstone. The final $3.5 billion comes as an 'equity bridge' from the lenders." (Nov 25, 2006).

If my math is correct, Blackstone is adding $13.6 billion to the underlying debt load of Equity Office. Bank of America and Goldman Sachs are providing the equity bridge of $3.5 billion, which, hopefully (!), will be sold at a profit to "other LBO firms and hedge funds."

But the Wall Street Journal questions the wisdom of the equity bridge, referring to it as "dangerous" and "a hot potato they have to pass on before the music stops." Oops. ... So whaddya think? Bring it on!

-- Peter Pike