Equity Office showdown nears

NEW YORK (CNNMoney.com) -- Blackstone Group is closing in on the biggest buyout ever, but a rival bidder, which has been a thorn in the side of the private equity house, could raise the stakes Wednesday.

A consortium led by Vornado Realty Trust (Charts) has until Wednesday to submit a counterbid to Blackstone's takeover offer for Equity Office Properties Trust. Including the assumption of debt, Blackstone's current offer for Equity Office is valued at about $38.3 billion, which would make it the largest buyout on record.

Blackstone Group and a consortium led by Vornado Realty Trust are waging a takeover battle for Equity Office Properties Trust.

Market watchers said they wouldn't be surprised if the investor group composed of Vornado, Starwood Capital Group Global and Walton Street Capital made a counterbid.

"If you're going to enter the bidding, you're probably going to be prepared to counterbid," one analyst close to the deal surmised.

A Vornado spokeswoman said the group is continuing to conduct its due diligence and will respond at the appropriate time.

Equity Office Properties Trust (Charts), the nation's largest office building owner, operates a portfolio of about 600 buildings across the country.

The office building manager founded by real estate mogul Sam Zell initially agreed to be taken private by Blackstone last November for $48.50 a share in cash.

But Vornado jumped into the ring earlier this month with a $52 a share bid in cash and stock, sparking Blackstone to raise its offer to $54 a share - which is where the battle stands now.

Not all analysts, however, think a counterbid from Vornado is imminent.

Greg Sukenik, senior equity analyst at Zack's Investment Research, said he thinks it's more likely that Blackstone will buy Equity Office and Vornado will buy some of those assets from Blackstone.

Blackstone has some advantages on its side. For one, Equity Office will have to pay a $500 million breakup fee if it backs out of the deal with Blackstone.

The closely held group also is prepared to close on the deal shortly after Equity Office shareholders vote on its offer. That vote is scheduled for Feb. 5.

Private equity firms have been scooping up real estate investment trusts with the view that they've been undervalued in public markets.

Merger deals in the U.S. real estate sector nearly doubled last year to $162 billion, with buyout firms accounting for 38 percent of that value, according to deal tracker Dealogic.

But private equity firms have also been facing increased competition for takeover targets, which is pressuring deal prices.

"A lot of capital is available - and not just to traditional private equity firms. Strategic buyers and sellers are playing much more aggressively," said Colin Blaydon, director of the Center for Private Equity and Entrepreneurship at Dartmouth's Tuck School of Business.

Blackstone's current bid already represents a 11 percent premium to the proposal it made last November and could head higher if Vornado makes a counterbid.

Blackstone said it does not comment on speculation.

Market watchers said they'll be watching Wednesday's deadline closely to see just how high the bar is raised if Vornado sweetens its offer.

Debunking the private equity myth