It also opened up new challenges. When you invest in emerging markets, you’re trading the rule of law for growth. If you think you can count on receiving justice in a foreign courtroom, you should think again. So, the first question is always “Who’s your partner?” By that I mean “Who is going to watch your interests on the ground every day?
In the early 2000s, new malls were sprouting up all over São Paulo and Rio, and industry ownership, as I’ve mentioned, was highly fragmented. We partnered with a local private equity firm to create BR Malls as a growth platform in 2006, investing $86 million. Roughly a year later, we led BR Malls in an IPO on Brazil’s Bovespa at an equity valuation of roughly R$2.1 billion. The capital enabled BR Malls to lead the industry in acquisitions. Five years later, the company had nearly fifty malls. Total returns for public shareholders were over 26 percent, and BR Malls had an equity market cap of R$10.7 billion. By the time we fully exited the investment in 2010, BR Malls was the largest mall company in Brazil, and we had achieved a 4.2x multiple, or 48.6 percent IRR.
Frankly, there’s no substitute for limited competition. You can be a genius, but if there’s a lot of competition, it won’t matter. I’ve spent my career trying to avoid its destructive consequences. Competition skews people’s assessments; as buyers get competitive, the demand for assets inflates pricing, often beyond reason.
In very short order, we were able to persuade Blackstone to raise its bid to $48.50 a share for a total of $20 billion, plus $16 billion in debt, or $36 billion total. I insisted that our agreement include an unusually small breakup fee so other potential bidders wouldn’t be discouraged. The typical breakup fee is up to 3 percent of the selling price, but I set ours at $200 million — around 1 percent of the offer’s equity value. Obviously, this didn’t sit well with Blackstone, but it was not negotiable.
Blackstone’s ace in the hole was that it was offering an all-cash deal, as opposed to Vornado’s 40 percent stock. Blackstone was also aggressive about a quick deal closing, promising to close the transaction within two weeks of a scheduled Equity Office shareholders meeting on February 5, while Vornado had to wait a few months for its own shareholders’ vote and for the SEC’s ruling because of the proposed issuance of Vornado stock. A lot can happen in a few months, and I liked the certainty Blackstone was offering.
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Equity Office was the largest REIT in the country. We had spent a decade acquiring an irreplaceable collection of over five hundred of the best office buildings in every major market in the U.S. It was my baby. Truth is, had I kept the company private, I probably would have never considered selling. But when I took EOP public, I assumed a fiduciary responsibility to shareholders. In exchange for their capital, I made a commitment to give them the best return possible on their investment. That was my primary obligation. Nothing stood before that.