Thursday, January 11, 2007

EOP back up for sale...

Not sure if this is a story about a botched bond tender, or really a bigger story about how much money is chasing a finite number of deals. Anyway, a rival bid for EOP is forthcoming from a group led by Starwood Capital. One thing that is a bit fishy to me is why Starwood et. al. didn't show up to make an offer before now. In the muni market there is a saying: "every time someone touches a bond, it gets more expensive." Which means that once one person buys the bond, they are going to want a profit to sell it again. So if you are the 3rd person to see the offering, you are paying too much. I can't help but think Starwood is in this position now.

Anyway, what's more interesting for bond market types, is the fact that lowly bond holders are the ones holding Blackstone up from making this deal final. It seems that AIG wants a full make-whole call on the unsecured bonds it holds, and will accept nothing less. While most of EOP's debt was taken out at make-whole levels, their 7.25% '28, 7.5% '29, and 7.875% '31 issues were not. Blackstone originally offered to take them out at +160, and recently sweetened it to +70. But AIG and friends want the +20-+30 make whole call, which according to Reuters is worth $140 million. I didn't do the math myself, but that's real money, even to AIG.

This is playing out a bit like the story I described in an earlier post, for those interested in more detail.

Anyway, we are all wondering at what point private equity will run out of deals to make. I fell confident that at some point, some private equity deals will blow up, and it will be because private equity has too much cash chasing too few deals. But really, private equity will always exist because of certain systemic inefficiencies in the public markets. So the best private equity shops will resist the temptation to chase bad deals. As for the rest... well...

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