Comments by:Royal ShepardIndustry AnalystStandard & Poor’s Equity ResearchNew York City

As the ink dries on yet another public-to-private play, the $39-billion price tag on the Blackstone-EOP merger begs the question, did Blackstone pay too much? The price skyrocketed past Blackstone’s original $36-billion offer after Vornado’s competing offer fueled a bidding war–only to see Vornado backed out of the race at the 11th hour. According to last week’s Feedback Poll, 46% feel Blackstone overpaid for the Chicago-based office REIT. On the other hand, given today’s market, 54% didn’t blink an eye. Commentator Shepard falls in with the latter.

“You have to keep in mind that there were two very sophisticated investors that were bidding for EOP. They had access to the books and they are smart. You have to assume they have a pretty good taste for the cash flow they’re going to be getting for those properties. You have to take that into account when considering whether they overpaid or not.

“Also, you’re seeing a little spread between what private equity and public investors can pay for REITs. Private equity has access to low-cost capital, and they can take on more leverage than a public REIT can. They look at things a bit differently.

“In Blackstone’s case they started moving to raise rents aggressively almost immediately, from what I’ve heard, and I’m sure they were factoring that into their purchase price. Also, they had lined up buyers for a lot of the properties and they have already announced a couple of transactions. Obviously Vornado was doing the same thing, and they indicated that they were. They knew how much they were going to get for these properties so, from that standpoint, they probably weren’t taking a big gamble. How much Blackstone is going to hang onto, I don’t know.

“I think the number of buy-outs that have taken place, including EOP, have really driven valuations to pretty much a fair level. It’s hard to justify on a valuation basis getting real aggressive. I’m not one to speculate which one will be bought next, but if you look at them just from the standpoint of cash flow and fundamentals, I think overall they’re pretty fairly valued.”

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