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Lessons From The EOP Deal: Cash Is King, Break-Up Fees Count and No-Shop Provisions Don't

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If we were ever diligent to keep up with our long promised "Deal of the Day" feature, today's deal would obviously have been the Blackstone buyout of Equity Office Properties Trust. It's been news for a while, of course. But last night it finally got, well, finalized.
EOP was a giant real-estate trust. Basically a real-estate vulture fund that snapped up properties when owners found themselves in trouble with their debt. Many thought that it was too big to get bought, at least in one piece. If there was an exit strategy for EOP, it would be a break-up. But then came the buyout build-up of 2006, when the price tags on going private deals started showing numbers that once would have been implausible. (See this WSJ chart for the explosion of huge deals in the past year.) Suddenly, EOP was in play.
Blackstone was always the favored bidder. It had the money and the desire. The initial papers carried a no-shop provision and a break-up fee. But the break-up fee wasn't high enough to dissuade a competing group of bidders from jumping into the deal, offering a larger package of cash and equity.
Now "no-shop" provisions—which bar sellers from seeking higher bids from other buyers—are one of the few contractual provisions (as opposed to price points and asset valuations) that business people seem to care about in deals (at least in our experience). But it's not clear they actually provide much value, especially if the deal is big enough to grab headlines. The seller doesn't need to shop the deal if it's terms are spelled out on the front page of the Wall Street Journal.
But break-up fees—the amount a seller pays to a buyer who gets outbid after the deal is signed—do matter. Bankers and private equity folks will give you all sorts of reasons they want break-up fees—to pay for work already done, as a sign of good faith and fair play and a promise that the would-be buyers won't walk-away totally empty handed. But most of that is gum-flapping. What break-up fees really do is place a floor on the next highest bid. Every subsequent bid has to beat the last bid plus the fee to attract the sellers. As the Blackstone people pushed up their bid during negotiations, they also pushed up the break-up fee. In the end, the EOP-Blackstone break-up fee reached $720 million.
(Lawyers, by the way, hate break-up fees. Especially big ones. Or, rather, corporate lawyers hate them. Mostly because the plaintiff's bar loves to sue over these things, claiming that they discourage competing bids. A claim which has the unfortunate character of being largely true and the entire reason the break-up fees exist. But you didn't hear that from us.)
But what really won the day for Blackstone was the fact that their bid was cash. And cash is king. For a variety of reasons, current market conditions tend to favor bidders with money (what the industry calls "financial bidders") rather than bidders with experience (what the industry calls "strategic bidders"). Here Blackstone was offering EOP a mountain of cash, in part because they were already lining up follow-up deals to sell-off assets and recoup part of the cash. The competing group were real-estate guys and were offering cash and equity in an on-going business. But it quickly became clear that the EOP shareholders weren't interested in owning part of a business run by some other real-estate guys. They wanted the money, and Blackstone were the guys showing it to them.
'Course, you've got to be careful drawing any lessons from bid deals. Their very size alone means they aren't "typical" and rules that apply to them might not apply to the broader markets. Except that everyone else will be looking for lessons, and this deal will quickly become a "reference deal" against which others are measured. So might as well get a bit reckless with us. Everyone's doing it.
Update: More thoughts on no-shop provisions, break-up fees and the EOP deal from Larry Ribstein here. As always, very clear, very concise and worth reading. (Also, he pretty much anticipates a lot of our arguments above so what's not to like?)

How Blackstone Won a Prize
[Wall Street Journal]