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Is This Insider Takeover a Good Deal?

Most merger or acquisition announcements get a lot of notice. Occasionally offering a money-making opportunity, they're usually worth checking out. One that seemed to get little attention was the Brookfield Property Partners (NYSE: BPY  ) proposal to acquire Brookfield Office Properties (NYSE: BPO  ) . This insider deal, since Property Partners has a 51% voting interest in its target, has a lot of appealing characteristics. Is it good for Brookfield Office Properties shareholders, though?

What is the deal?
Brookfield Property Partners proposes to acquire the part of Brookfield Office Properties it doesn't own for $19.34 per common share. Each shareholder can receive either a limited partnership unit of Brookfield Property Partners or the $19.34 in cash. There is a maximum of 174 million Property Partners units (67% of the total value of shares tendered) and a maximum cash consideration of $1.7 billion (33% of the total value of shares tendered) to be expended.

Property Partners notes the transaction's benefits. The offer price was a 17% premium to the 30-day average and a 15% premium to the last price of Office Properties stock before the proposal. The deal is also expected to substantially increase the dividend for those who take partnership units. The combination will also create one of the largest, most globally diversified commercial property companies.

Who are the players?
While the suggested benefits sound attractive. It would be helpful to know more about the participants.

Brookfield Office Properties is an owner and developer of premier office space in the United States, Canada, Australia, and the United Kingdom. Its portfolio is composed of 114 properties totaling 85 million square feet in major cities such as New York, Los Angeles, Toronto, London, and Sydney.

Office Properties has shown itself to be an astute acquirer. It recently purchased MPG Office Trust. The deal, valued at $2.2 billion including debt, could be called a "motivated seller" transaction. MPG had been scrambling to pay off debt from ill-advised acquisitions made near the peak of the U.S. real estate market. The buy will make Office Properties the largest office landlord in downtown Los Angeles, where MPG once dominated.

Brookfield Property Partners is a global commercial real estate owner, operator, and investor. Its portfolio includes more than 300 office and retail properties encompassing roughly 250 million square feet. In addition, it has interests in 20,000 multi-family units and 62 million square feet of industrial space. Property Partners' stated goal is to be the leading global investor in best-in-class commercial property assets.

The acquisition of Office Properties is a major step toward achieving that aim. One benefit would be the increase in trading liquidity of Property Partners units. That would make access to capital markets easier, which should help fund the partnership's growth. A successful transaction would also provide attractive synergies. Noticeable cost savings could be realized from eliminating duplicative costs.

Brookfield Asset Management (NYSE: BAM  ) is the real power behind the deal, however. This asset management behemoth has more than $180 billion in assets under management, more than 24,000 employees worldwide, and a history that goes back more than 100 years. The company is focused on property, renewable power, infrastructure, and residential development investments.

It's a shrewd asset collector. It looks for assets that are critical to economic activity and benefit from barriers to entry or other competitive advantages, which can provide stable cash flows and strong operating margins. This is why it has a strong interest in real estate. Asset Management has a major stake and meaningful say in the proposed Office Properties deal. It owns approximately 92% of Property Partners, and Property Partners, in turn, has a 51% voting majority stake in Office Properties.

Is it a good deal?
Beyond the players, Office Properties shareholders want to know if they are getting a fair offer. The company announced adjusted funds from operations -- FFO, a common method of reporting profitability in the real estate industry -- of $174 million in its latest quarter. This is compared with $164 million during the same period in 2012. Based on annual estimated FFO of around $623 million, at a 27.3% margin on revenues of $2.28 billion, the take-out offer for Office Properties is roughly 15.8 times FFO.

Boston Properties  (NYSE: BXP  ) is a good fair-value comparison. A top U.S.-based office property real estate investment trust, its portfolio consists of 177 properties holding about 44.6 million square feet. The company, concentrating on major markets such as Boston, New York, Washington, D.C., and San Francisco, has an impressive occupancy rate of around 92%.

The real estate owner, with more than $19 billion in assets, reported FFO of $198 million for the most recent quarter, up over 12% from the prior year. It currently trades near 20 times FFO, assuming a 37.7% margin on $2.14 billion in expected revenues that generates funds of around $807 million.

Boston Properties' numbers might suggest the $19.34 per share offer for Office Properties may be conservative. An enterprise value comparison seems to confirm that. At the offer price, Office Properties has an enterprise value (stock market capitalization plus debt) around $21.6 billion or 9.5 times revenues. Boston Properties currently trades with an enterprise value of roughly 12.8 times.

The proposed acquisition of Brookfield Office Properties by Brookfield Property Partners looks likely, since Brookfield Asset Management appears to support it. Though the deal seems confusing with the number of Brookfield's involved, it could be an opportunity with decent upside and limited downside.

Assuming a successful transaction, Office Properties shareholders would get a slight gain from the recent market price or a unit in a real estate partnership. A partnership of substantial size with merger benefits that could indicate a prosperous future. There is also the chance of a bid increase.

While no formal buyout offer has been made, Office Properties has appointed Morgan Stanley to act as financial advisor and determine its fair value. Boston Properties' comparable worth may indicate a higher price is reasonable. Without a deal, there doesn't seem to be a lot to lose. Holding the shares of a world-class real estate company, probably fairly valued at least in the $19 a share area and offering a decent dividend, doesn't seem all that troubling.

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Bob Chandler

A dedicated Graham-style value man, Bob bought his first stock in 1986 and though he’s a miserable market timer, longer-term calls let him earn a meager living from his investments. With an MBA and MS in Accounting, Bob relies more on Hetty Green's advice for successful investing: "Buy cheap and sell dear. Act with thrift and shrewdness and be persistent."

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