Ding Dong

I was rummaging through some old files yesterday and came across an interesting tidbit from a private equity conference I attended in the Fall of 2005. As is usual in such confabs, Sam Zell, founder and Chairman of office REIT Equity Office Properties Trust (and a very successful man), was invited to talk about the "secrets" to his success. He said a great many interesting things, but one interested me so much I wrote it down verbatim in my notes.

Before I hit you with the punchline, however, a brief review of the current situation would help. You may recall that private equity hegemon Blackstone Group announced last November that it was buying EOP for $48.50 per share, or $36 billion all-in. REITs are not volatile things, and commercial real estate has been on a tear, but Blackstone's offer represents a rich 5.9% cap rate and 16.9 times forecast 2007 EBITDA. The proposed deal structure includes $29.6 billion of debt, a $3.2 billion equity check from Blackstone, and—most interestingly for our readers—a $3.5 billion equity bridge from Blackstone's bankers and financiers, Bank of America, Bear Stearns, and Goldman Sachs.

Now, it is fair to say that investment banks have until recently been very leery of anything remotely resembling a bridge, ever since First Boston's near-death experience from a bridge loan for Ohio Mattress (affectionately known as the "Burning Bed"), issued just in front of the great Junk Bond Meltdown of the late 80s. Things are different this time, apparently. As the private equity juggernaut has rolled on in recent years, banks like these have gotten increasingly desperate to share in the lucrative financing fees associated with LBOs and increasingly envious of the apparently limitless simoleons their PE clients have been lighting their cigars and papering their bird cages with. Bridge loans are now routine, and I guess it should not surprise anyone that we have finally seen a multi-billion dollar equity bridge cantilevered out over the abyss, teetering on the twin pillars of Hope and Greed. In this case, the bridging banks do not even have any voting rights, and Blackstone has a six month exclusive window to syndicate the bridged equity to nice, compliant junior partners. Sweet.

Of course, the final story on EOP's buyout is not yet written, since a consortium led by Vornado and Starwood Capital has lobbed in a competing offer at $52.00 per share ($37.6 billion). If consummated at that price, this would make EOP the largest LBO ever. Sam Zell, the archetypal value investor, must be giggling into his funky Abe Lincoln beard.

Which brings me back to Sam's remark from a little over a year ago. He said—and I quote:

"You have to understand that if Wall Street was smart, I couldn't be rich."

Sam Zell is seriously rich, Dear Reader, showing up at #52 in Forbes' 400 list with an estimated net worth of $4.5 billion.

Is that a bell I hear, ringing?

© 2007 The Epicurean Dealmaker. All rights reserved.