Investors wary as Blackstone re-registers in hotel chain
Deceive me once, shame on you. Cheat on me twice, shame on me. But who is responsible in the third place? In March, the US hosting chain Extended Stay America announced that it would be acquired through a partnership including Blackstone for $ 6 billion.
It was like déjà vu, as the world’s largest real estate investor had, over the past 18 years, acquired twice before and then flipped the company which is effectively an apartment building and hybrid motel.
Although Blackstone made billions from previous stays, Extended Stay has hardly been a big thief since. The sale price of $ 19.50 is lower than the company’s initial public offering price from 2013, when Blackstone had listed it. The premium over the company’s previous share price before the offer is only 15 percent. And most oddly, this seems like an odd time for a hotel business to sell itself as the pandemic abates.
Unsurprisingly, within weeks, an investor revolt erupted. Tarsadia Capital, which owns 3.9% of Extended Stay, has waged a public proxy fight to get other shareholders to vote against the deal, arguing that “the timing of the sale is wrong” and “the price of the sale is wrong ”.
The company, which invests on behalf of a family office, had been discussing strategy with the company for months and was in the process of appointing its own roster of directors to the board when it was blinded by the announcement of the sale.
A shareholder vote is slated for June and the proxy advisory firms have yet to deliver their crucial verdicts. The company’s stock price had traded above the deal price a bit and Tarsadia’s frustration is understandable.
Extended Stay has proven that it is not a large public company. But simply handing over the keys to a savvy operator at a mediocre price, just as management had even talked about a turnaround, must not do any good.
Blackstone and Starwood Capital had each expressed interest in buying Extended Stay in 2017 at prices above $ 20 per share, according to securities filings.
Blackstone first bought the company for $ 3 billion in 2004, then cleverly sold it to another private equity firm in 2007 for $ 8 billion. The company quickly went bankrupt due to the financial crisis and its high debt load. Blackstone then led a group to buy it out of bankruptcy in 2010 for $ 4 billion. In 2013, Extended Stay re-listed its shares at a valuation of $ 8 billion.
Extended Stay is unique in that over 40 percent of its customers book for more than 30 days and, rather than tourists, its customers are touring consultants, nurses and the like.
In the years leading up to the pandemic, various financial engineering strategies were considered to increase value, as well as blackstone and Starwood bids above $ 20 per share which were rejected.
During the pandemic, Extended Stay had been resilient as it relied less on leisure travelers. Between the start of 2020 and March 1, 2021, its shares rose 14% while Marriott’s shares remained stable. The chief executive of the company noted in a call for earnings at the end of February that occupancy rates were relatively high and that the extended stay “would not only return in 2019. [revenue per room] well ahead of industry, but also exceed these levels ”.
Days later, the company announced the sale to Blackstone, which was in partnership with Starwood. The same CEO said the deal “reflects the upward value inherent in our strategic initiatives while eliminating market and execution risk.” The securities deposits reveal that the extended stay management feared that the company’s capital expenditure needs (the average age of its more than 500 hotels is 20 years) might be higher than budgeted forecasts.
Understandably, Tarsadia and others grasped the apparent inconsistency between pre-agreement optimism and the current resignation. Unusually, two members of the Extended Stay board of directors voted against the transaction. One dissenting director thought it was not the right time to sell the business and the other felt the 15 percent bonus was too small. If two insiders didn’t agree to the deal, the company should understandably expect outsiders to shake their heads.
Earlier this year, hedge funds were successful in forcing another leading private equity firm, Vista, to increase a cheap bid on a multibillion-dollar software company by 11%. Blackstone and Starwood aren’t hard stuff, but they also have loads of cash that they need to get work done. Perhaps their greatest skill lies in figuring out exactly what price to pay to win 50.1%. 100 of the votes and not pay a penny more. It will be interesting to see if Blackstone can strike gold and nail the trio. But even getting this chance is not yet guaranteed.