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Billionaire Sam Zell Joins Corvex and Related Proxy Battle For Control Of $2.9 Billion Commonwealth REIT

At the right moment in a difficult conflict, particularly where it might go either way, it becomes time to bring out the heavy artillery. This is precisely what New York activist hedge fund Corvex Management and partner Related Management, part of The Related Companies, are now doing in their battle to overturn the management and board at CommonWealth REIT, based in Newton Massachusetts.

Jeff-Blau-Keith-Meister-Sam Zell

 (L-R) Jeff Blau, Keith Meister and Sam Zell

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Keith Meister of Corvex, and Jeff Blau the CEO of Related, yesterday announced that Chicago real estate billionaire Sam Zell, and his sidekick David Helfand, had agreed to head up their slate to entirely replace the board at CommonWealth if the current consent solicitation now under way should be successful.

Moreover, Sam Zell has agreed in that eventuality to be willing to then take on the role of Chairman of the Board of CommonWealth, with David Helfand becoming its CEO.

First, lets back up a bit to understand what in the heck is going on here. In February of last year Corvex and Related announced they had collected a 9.6% ownership position in CommonWealth. They then began an attempt to oust Barry and Adam Portnoy, the father and son team who presently control its management through an outside property management firm they control, taking out very large fees for the privilege.

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CommonWealth is a national office building real estate investment trust that owns interests in over 50 million square feet of leasable space. Listed on the New York Stock Exchange it has a current market capitalization of about US$2.9 billion.

Last November Corvex and Related crossed the required two-thirds required threshold of shareholder votes, receiving a 70% majority, in a proxy consent solicitation they had initiated to first remove the REIT’s Board of Trustees and then to instead install their own slate.

For procedural reasons only, an Arbitrator ruled the vote would have to be taken again and that is what is now happening. In the mean time the Portnoys have promised change at CommonWealth, but Corvex and Related argue it is too little and too late and have initiated a second proxy consent solicitation, one that this time they hope will definitively settle the issue in their favour.

 Adam Portnoy,    CommonWealth / Getty

Adam Portnoy,  CommonWealth

In putting the process in motion again, Corvex and Related have gone to some lengths to publicize their positions, even setting up their own special website for shareholders to stay up to date as the matter now unfolds. Effective communications is always key to success in business, and especially so for a proxy solicitation.

The essence of their case, laid down in a carefully detailed presentation, boils down to claims of mismanagement of the REIT’s activities, and withdrawal of excessive fees by the Portnoys to manage the business, sucked out of the REIT to an outside property management company, which they personally control.

In addition, even though the real estate trust’s shares fell from nearly US$52 per share to the low twenties today, over a six year period, and moreover to only the mid teens when they first announced their proxy intentions last February, the fees paid to the Portnoys instead went up 40 percent in the same period.

Sam Zell commented yesterday on his new relationship with Corvex and Related, “We are fully supportive of Corvex and Related’s efforts to maximize value at CommonWealth for all shareholders. We see an attractive opportunity at CommonWealth uniquely suited to our expertise in leading public real estate companies and in turning around underperforming assets. We created three of the most successful REITs in the U.S., including Equity Office, which at the time of its US$39 billion sale in 2007, owned space in over 500 office buildings across the country.”

“One of our core operating principals is the alignment of interests between company leadership and shareholders, ” he continued. “We are concerned about any attempts to preclude shareholder rights, and our companies are free of such impediments. We believe the shareholders of our REITs have clearly benefited from having an accountable, properly aligned board overseeing an effective, internalized management team with the sole goal of increasing shareholder value.”

Obviously the addition of Sam Zell to the Corvex/Related camp may help swing over a number of shareholders who may otherwise have been content to sit on the fence, and in a closely fought battle this could be decisive.

If the proxy consent solicitation should be successful the removal of the existing board would not in itself install the Corvex/Related slate, but would trigger a subsequent special meeting of shareholders for the purpose at which such a vote would then be a natural conclusion. Still, winning the first step is obviously key to the whole game and that is why this announcement has been made now.

Keith Meister of Corvex and Jeff T. Blau of Related said, “We are thrilled to be joined by Sam Zell, whose chairmanship of other REITs has unquestionably maximized value for shareholders. Additionally, David Helfand’s unmatched real estate management skills and superb track record in executive leadership qualify him to enhance CommonWealth’s portfolio. We believe that once CommonWealth shareholders are given a choice between the Portnoys and their record of value destruction and Sam Zell’s record of value creation for shareholders, the choice is clear.”

Neither Zell, nor Helfand currently own any CommonWealth stock. Corvex and Related have, however, granted an entity associated with Zell and Helfand an option to acquire up to approximately 4 million of their own CommonWealth shares, subject to various terms and conditions.

On February 10, 2014 CommonWealth announced that it has set a “conditional” record date of February 18, 2014 for the consent solicitation. Once this date is firmed up the consent solicitation must then be concluded within 30 days of the record date.

Not to be ignored with the Zell announcement, CommonWealth President Adam Portnoy immediately fought back with a statement of his own, saying, “The announcement by Related/Corvex that Mr. Zell may serve as Chairman and Mr. Helfand may serve as CEO of CWH is an obvious attempt to divert shareholder attention from Related’s abysmal historical track record of operating public real estate companies.”

“I am surprised that Mr. Zell and Mr. Helfand have joined the efforts by Related/Corvex in their pursuit of full control of CWH without first approaching CWH to fully understand the Company’s business plan and the Board’s commitment to governance enhancements. The track record of Related’s principals when they have controlled publicly owned real estate companies is certainly not in keeping with the public company governance principles that Mr. Zell has espoused.”

Well, the battles lines are finally well and truly drawn, after a massive rear-guard action that the Portnoys fought all through 2013 to delay a clear vote on the issue at stake. Now it looks like shareholder democracy will finally determine the outcome, within about another month at most.

With Sam Zell now on deck, however, if one were a betting person one would have to conclude that the chances of Corvex and Related succeeding just got a whole lot better.




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