Brookfield Office Properties, Inc. (NYSE: BPO) announced plans on April 25 to acquire MPG Office Trust, Inc. (NYSE: MPG) for approximately $180 million. Brookfield intends to use the newly acquired assets to form a new fund focused on the office market in downtown Los Angeles.
The portfolio of the new fund, DTLA Holdings, would consist of Brookfield’s existing downtown LA assets and all of the assets of MPG, which owns and operates Class-A office properties in the city’s central business district. Additionally, DTLA plans to acquire two additional properties in downtown LA, including a newly redeveloped retail complex from Brookfield and a development site.
BPO’s contribution to DTLA Holdings would total approximately $550 million, including the equity in its existing Los Angeles assets totaling $410 million as well an additional investment of $140 million.
“This proposed transaction provides the opportunity to combine and operate a sizeable portfolio of the highest quality assets in a major U.S. gateway city,” said Dennis Friedrich, chief executive officer of Brookfield Office Properties. “Downtown Los Angeles has all the attributes of a dynamic urban market, including modern transportation infrastructure, a growing residential population and access to a diverse labor pool.”
Under the terms of the merger agreement, the holders of MPG’s common shares of stock would receive $3.15 per share in cash. That represents a 21 percent premium on MPG’s closing share price of $2.60 on April 24.
The agreement also called for Brookfield to tender an offer to purchase all preferred shares of MPG stock at a price of $25. Any preferred shares not tendered would be converted into new preferred shares of Brookfield stock “with rights, terms and conditions substantially identical to the rights, terms and conditions of the outstanding preferred shares” of MPG stock. If more than two-thirds of the outstanding MPG preferred shares are tendered, then Brookfield will have the right to convert all of the untendered MPG preferred shares at the $25 tender price.
The announcement comes after a “lengthy and exhaustive search” for a buyer, according to David Weinstein, president and CEO of MPG. “The transaction potentially offers both MPG’s common and preferred shareholders a liquidity event that would remain uncertain if the company were to continue on as an independent entity,” he said.
Michael Knott, analyst with Green Street Advisors, said the merger appears to be a creatively structured “win-win” deal for the common shareholders of both companies. However, he said he worries about the potential for adding vacancies to the Brookfield portfolio and any potential impact on its balance sheet.
The deal is contingent upon shareholder approval and is expected to close in the third quarter of 2013.
Brookfield’s shares were trading up close to three percent at $17.91 mid-day April 25 after closing the previous day at $17.43.