Brookfield to buy O&Y for $2-billion

O&Y Properties Corp. and its affiliate said yesterday they will sell their entire real estate portfolio for $2-billion, including debt, in what will be the largest property transaction in Canadian history.

The winning bid was a consortium led by BPO Properties, a company ultimately controlled by Brascan Corp., a Toronto conglomerate with a heavy real estate weighting. The Financial Post reported on Friday a deal was "imminent," with Brascan the victor.

The deal was set in motion in February when Philip Reichmann, chief executive of O&Y, said he and other company officials felt their shares were undervalued. In addition to O&Y Corp., O&Y Real Estate Investment Trust was part of the sale. The company owns 42% of the trust.

"This is the largest sale in terms of public real estate I can remember," said one real estate executive close to the transaction. "This is one of those deals where everybody took a look at it."

The 47-year-old Mr. Reichmann said in an interview real estate had simply gone up too much to resist selling. His family controls 34% of O&Y Properties and will walk away from the deal with considerable cash.
"I'm not going to retire," he joked, adding he might be willing to look at other real estate opportunities. "If the economy continues to stay strong and interest rates stay low, and they don't have to stay the same -- they could go up one or two percentage points -- real estate could continue to be very strong."

Nearly 50 parties signed up to take a look at the portfolio. The number was whittled down to nine, then shortlisted to four. It was a team lead by BPO Properties, 89% owned by Brookfield Properties, that managed to put together the right package to snare the 9.7-million-square-foot, pan-Canadian office building portfolio.

The deal includes First Canadian Place, a 2.7-million-square-foot tower at Bay and King streets in Toronto, often referred to in real estate parlance as "center ice."

As first reported by the Financial Post, the bid from the Brookfield consortium, as it was referred to in a release yesterday, included the Canada Pension Plan Investment Board. Alberta Treasury Branches had also been mentioned as a potential bidder.

Brookfield said the consortium included more than one institutional bidder but that CPP was largest of the group. CPP, which invests pension savings not needed to meet current commitments, has been actively trying to bulk up its portfolio with a plan to acquire $8-billion in assets over the next decade.

"This investment is an important step in the continued diversification of the CPP reserve fund," said David Denison, chief executive of the CPP Investment Board. "Real estate investments traditionally have delivered attractive long-term returns that tend to rise with inflation. This is an outstanding portfolio with landmark properties across Canada."

The deal marks the second time First Canadian Place -- one of the country's first skyscrapers -- has left the hands of the Reichmann family. The building was developed in 1975 by Olympia & York Developments Ltd., the company founded by Paul Reichmann and his brother Albert and Ralph. (Philip is Albert's son.)

O&Y Properties bought back First Canadian Place in 1999 from First Place Tower Inc., a company created by the former bondholders of Olympia & York who took control of the tower when the latter was forced into bankruptcy.

In a conference call with analysts, Philip Reichmann emphasized: "We feel Brookfield is a suitable and appropriate owner of the portfolio, which includes our flagship First Canadian Place."

It's not the first time Brookfield has moved in and snapped up key Reichmann family assets. It was Brookfield, under current Brascan chief executive Bruce Flatt, who purchased the World Financial Center in New York when Olympia & York was in bankruptcy trouble.

This time Paul Reichmann had been one of the rumoured bidders, interested in acquiring the O&Y portfolio, including First Canadian Place.

In the end, price was the only thing that mattered. "Our goal was to surface the highest and the best price and we feel that we have achieved that," said Mr. Reichmann. "We felt it was the right time to sell."

The Brookfield group is paying $13 a share for O&Y Properties Corp., a 36% premium over the 30-day weighted average price of its stock before the announcement of a potential sale was made. The REIT is commanding $15.50 a unit, an 8% premium over its share price before the two put themselves in play.