Is Equity Office Deal "Fair"?

Half Full or Half Empty? ... "There is actually a lot less risk in the deal than the headlines would suggest. ... If Blackstone sells off 40% of assets, they could pay down $11.6 billion in debt to bring the debt ratio down to 75%, and still have $700 million left over to return to equity investors (a 10% tax-free return of capital)."

That's Matt Anderson at Foresight Analytics in Oakland, CA, responding to last week's Dispatch, Sports Talk Radio Meets Real Estate (Nov 30) about Blackstone's acquisition of Equity Office.

Here's the math behind Anderson's comment. Blackstone will pay $48.50 per share, creating an initial capitalization of $36.3 billion ($6.7 billion of equity/equity bridge and $29.6 billion of debt). That's a debt-equity ratio of 82%.

Now assume that Equity Office shares are really worth $60 (as one critic charges) making Equity's "true value" $40 billion. If Blackstone sells 40% of the portfolio for $16 billion, the value of the remaining portfolio would be $24 billion.

So, in theory (!), Blackstone could leave $16 billion of debt in place (75% leverage) and retain $6 billion of equity. Thus, leaving $700 million to be returned to investors tax-free (ignoring the disposition fees). Is he right? Search me.

But let's turn the tables on Wall Street, which constantly screams about excessive real estate transaction costs. According to SEC filings, "Merrill Lynch & Co. acted as exclusive financial advisor to Equity Office. Goldman, Sachs & Co., Bank of America, Bear Stearns, Blackstone Corporate Advisory and Morgan Stanley acted as financial advisors to Blackstone." (8-K, Nov 20, 2006)

So what are their fees? Millions, tens of millions, more? Will these fees impact their judgment about whether or not this is a "fair" transaction? Just asking.

-- Peter Pike