Equity Office to Buy Spieker Properties

Equity Office Properties Trust, the largest U.S. office-property owner, made a huge bet on the California economy Friday, agreeing to buy Menlo Park-based Spieker Properties Inc., one of the state’s largest landlords, for about $5.1 billion in cash and stock plus $2.1 billion in debt.

The purchase, believed to be the biggest ever in the U.S. real estate business, makes Chicago-based Equity’s chairman, Sam Zell, Los Angeles’ second-biggest landlord, and the largest commercial property owner in San Francisco, San Jose and Seattle. After the purchase, about 40% of Equity Office’s earnings will come from the West Coast.

“We believe the negative [West Coast] news has largely been disseminated,” said Equity Office Chief Executive Timothy Callahan.

However, some say the sale indicates West Coast rents have peaked, and the market will continue to soften.

“Maybe the strength in California is not as great as many have been led to believe and the outlook is weaker than many thought,” said Louis Taylor, an analyst at Deutsche Bank Alex. Brown.

Last month, Morgan Stanley Dean Witter & Co. cut its rating on Spieker to “outperform” from “strong buy,” the first time in seven months the shares were downgraded by an analyst. Credit Suisse First Boston followed Morgan Stanley’s action by cutting its rating to “buy” from “strong buy.”

Rents at some of Equity Office’s properties in San Francisco and the Silicon Valley are down 30% from last year’s peak, officials said.

However, management insists that it has factored a softening of California rents into the price--about 10% this year, with rents expected to remain essentially flat.

Although Spieker is based in the heart of Silicon Valley, company officials say it hasn’t suffered from an exodus of Internet and other technology start-ups. And Equity officials say only 2.5% of their space was leased to tech start-ups.

Despite the threat of recession, Equity officials believe the California market, with its tough zoning laws, eventually will bounce back and job growth will surge, sending rents upward.

“It’s not an economy that’s going away,” said Diane Morefield, a Zell spokeswoman.

Equity Office already owns some of the Southland’s premier high-rise properties, including 2 California Plaza and 550 S. Hope in Los Angeles and 500 Orange Tower, 1920 and 2010 Main Plaza and 18301 Von Karman in Orange County.

While Equity is known more for its glitzy high-rises, Spieker owns primarily low-key suburban properties. It holds about 2.8 million square feet of office space in Los Angeles County, including the 24-story Westwood Tower and the Santa Monica and Santa Monica Gateway business parks. Occupancy at these buildings averaged 97% at the end of last year.

In Orange County it owns 4.1 million square feet of office space, including City Tower and Stadium Towers.

The acquisition also will give Equity 1.75 million square feet of office space in San Diego and 400,000 square feet of industrial properties across the Southland.

Spieker shareholders will receive $58.50 in cash and stock for each of their shares, for a total of $4.6 billion, a 12% premium to their closing share price Friday. The transaction also includes $431 million in preferred stock and the assumption of $2.1 billion in debt.

The purchase would increase Equity Office’s office holdings by 25 million square feet to 124 million square feet across the country.

Spieker Chairman and founder Warren Spieker said the company was selling to “reduce risks” for its shareholders, but the decision wasn’t motivated by concern about its markets. “This is not a timing issue,” he said. “We don’t consider ourselves sellers.”

The companies said Warren Spieker and co-Chief Executives Craig Vought and John Foster will join Equity Office’s board.

The transaction includes a $160-million fee to Equity Office if the acquisition isn’t completed under certain circumstances. The companies said the transaction should close in the second quarter.

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Bloomberg News was used in compiling this report.