The EOP transaction

This WSJ article discusses Blackstone’s purchase of EOP, making a couple of interesting points.

First, Blackstone’s paying a lot: the total $39 billion (including $16 billion in debt assumption) buys a 5% yield from rents, lower than the yield on Treasuries and on other Blackstone deals. Moreover, there’s a hint of the winner’s curse in Vornado backing off, particularly given that Vornado is one of the best in the business at squeezing money out of property. The article suggests that Blackstone already knew of high-value purchasers and of ways to get higher yields, suggesting that the price will look better at those yields than at the ones EOP was earning.

Second, there’s a lesson about deal structure. EOP shareholders ended up with three billion more dollars than Blackstone's initial bid, despite a “no shop.” At the same time, in earlier “go shop” deals like HCA there were no competing bids. The key is that EOP insisted on giving Blackstone a relatively low break fee, only increasing that as Blackstone raised its bid.

The “no shop” evidently gave Blackstone at least enough cover to induce it to make the initial bid. But Zell and EOP understood that with assets like these, whose value is readily apparent, other bidders can emerge even if the target doesn’t fish for them. Indeed, the article points out that investors see "go shops" “as a form of legal cover for independent directors worried they will be perceived as favoring managers buying out the companies they run on the cheap.”  In other words, there’s a lot to structuring these deals, and it can be misleading to rely on a single term. That may be a little too much complication for pundits like Ben Stein to grasp.

Finally, the article points out that Zell may have preferred Blackstone's cash to the riskier stock in the Vornado deal.  The diversified shareholders of EOP might have felt differently.  Yet despite this theoretical difference in views, it looks like Zell got a pretty deal for the shareholders.