Equity Office rallies on buyout; REITs climb on consolidation speculation; Freeport-McMoran up on deal

By Kenneth Lim

Boston, Nov. 20 - Real estate investment trusts were thrust into the spotlight on Monday, with a large buyout offer for Equity Office Properties Trust fueling discussion about consolidation in the sector.

Equity Office's 4% convertible due 2026 improved about 5 points outright with its stock, after private equity firm Blackstone Group offered to buy the company for $36 billion plus debt.

The Equity Office deal sparked an across-the-board rally among REITs, with Boston Properties Inc., First Industrial Realty Trust Inc., National Retail Properties Inc. and Vornado Realty Trust all gaining on the news.

Meanwhile, Freeport-McMoran Copper & Gold Inc.'s 5.5% convertible preferred stock gained about 33.75 points to 1,307.5 against a stock price of $56.35 after the company said it was buying Phelps Dodge Corp. for $25.49 billion in stock and cash. Freeport-McMoran's 7% convertible due 2011 did not trade.

Freeport-McMoran stock (NYSE: FCX) closed at $55.63, down by 3.08% or $1.77.

"The preferreds were up a little, but those were really small trades," a sellside convertible bond trader said.

Freeport-McMoran, a New Orleans, La.-based copper and gold mining company, said over the weekend it was offering $88 in cash and 0.67 of a common share of Freeport-McMoran common stock for every Phelps dodge share, valuing the bid at about $125.57 per Phelps Dodge share. About $16 billion of the consideration could be paid with debt.

The deal was seen as a potentially positive development for Freeport-McMoran's credit. Moody's Investors Service said it may upgrade Freeport-McMoran's Ba3 corporate family rating, while Standard & Poor's is also reviewing Freeport-McMoran's BB- rating for a possible upgrade.

Moody's said the acquisition will reduce Freeport-McMoran's dependence on its Indonesian mine, with Phelps Dodge's mines spanning the Americas and Africa. But Standard & Poor's also noted that the combined company will be steeped in debt, and is likely to remain below investment grade.

Equity Office jumps on buyout

Equity Office's 4% convertible due 2026 improved about 5 points outright and stayed mostly unchanged on a hedged basis after the company received a $36 billion offer from the Blackstone Group.

The convertible traded at 118.25 against a stock price of $48. Its 5.25% convertible preferred also rose about five points outright, changing hands at 67.125 versus a stock price of $48. Equity Office common stock (NYSE: EOP) closed at $48.14, up by 7.65% or $3.42.

"That was a little active today," a buyside convertible bond trader said. "On a dollar-neutral basis it was just unchanged. It was takeover protected, so if you came out OK if you were on a market hedge. It was kind of a non-event for you."

Blackstone is offering $48.50 in cash per common share of Equity Office, an 8.5% premium to Equity Office's closing stock price on Nov. 17. Blackstone will also call the company's 5.25% convertible preferred and its 7.75% preferred at par plus accumulated and unpaid dividends.

Equity Office's board has approved the buyout and recommends that shareholders approve the deal. Completion of the takeover is expected in the first quarter of 2007.

Chicago-based Equity Office is the largest public manager and owner of office real estate, and the deal will be the largest REIT buyout in history.

"It wasn't expected," the buyside trader said.

A sellside convertible bond analyst said the deal seemed likely to go through.

"I haven't heard too much skepticism about it," the analyst said. "For me, when I looked at it, there was maybe more of a chance that it might take maybe a little longer than first quarter '07, but I don't have anything to base that on other than they have some approvals to get, including consents and tenders for the straight debt, and it may be difficult to do that. This week is pretty much short with Thanksgiving, and you have the second half of December when nothing's going to happen."

But any delay is unlikely to be significant, the analyst added.

"I don't think that would be a big deal," the analyst said. "It might make the takeover protection worth a little less, but it would only be worth slightly less."

The takeover protection for the convertible bond, which was issued this year, "works pretty well," the analyst said. Holders of the convertible will get to receive the equivalent acquisition consideration on their holdings, plus a make-whole premium. Putting the bonds back to the company will be moot.

"Parity is going to be 112, roughly, so that [whether investors can put the convertibles] wouldn't apply," the analyst said. "They have a preferred, the 5.25% convertible preferred, and that's in the money, so that's just going to get called."

REITs rise on EOP deal

Equity Office was not the only REIT to benefit from Blackstone's offer.

Boston Properties' 3.75% convertible due 2036 gained about 4 points outright, trading at 114.5 against a stock price of $115.625. Shares of Boston-based Boston Properties (NYSE: BXP), an office property developer, climbed 6.38% or $6.93 to close at $115.55.

Meanwhile, First Industrial's 4.625% convertible due 2011 rallied to 106 against a stock price of $49. Shares of Chicago-based First Industrial (NYSE: FR), which invests in industrial property, rose to $49.26, a gain of 3.16% or $1.51.

National Retail Properties' 3.95% convertible due 2026 changed hands at 102.75 versus a stock price of $23. The Orlando, Fla.-based retail REIT saw its common stock (NYSE: NNN) improve 0.66% or 15 cents to close at $22.94.

Vornado's new 3.625% convertible due 2026 improved about a point to 99.75 against a stock price of $117, while its older 3.875% convertible due 2025 traded at 138 versus the same stock price. Vornado stock (NYSE: VNO) improved 3.34% or $3.91 to close at $120.91. Vornado is a New York-based REIT.

"The whole REIT sector's doing a little better," a buysider said. "People are wondering who's going to be the next one to go, but whether there's anybody specific, I don't know."

A convertible bond analyst said the Equity Office deal was just the latest in a series of consolidations in the sector.

"The whole sector's been consolidating for some time," the analyst said. "There's been plenty of others, although this is a big one."

"The whole sector was up 2, 3, 4, 5% in sympathy with this," the analyst noted. "There's at least hope that there's going to be more consolidation."

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