Blackstone, Starwood Boost Extended Stay Bid Amid Opposition
(Bloomberg) -- Blackstone Group Inc. and Starwood Capital Group increased their offer to buy Extended Stay America Inc., but it wasn’t enough for two sizable shareholders.
The private equity firms agreed to increase their offer by $1 to $20.50 a share, a 21% premium on where it shares closed the day prior to the original offer being announced, according to a statement Tuesday. That came after Glass Lewis & Co. and Institutional Shareholder Services Inc. came out in opposition to the deal last week, agreeing with a group of shareholders who had questioned the timing, process and price.
Extended Stay was up slightly Tuesday to close at $19.76 in New York, for a market value of roughly $3.5 billion.
Extended Stay has two boards, one for a real estate investment trust that owns hotel properties, and one for an operating company. The two boards unanimously approved the merger at the higher price. Two directors on the board of the REIT voted against the initial agreement. The company also said it would move a shareholder vote on the matter to June 11.
Blackstone and Starwood announced on March 15 that they agreed to buy Extended Stay for $19.50 a share. Six investors, collectively owning more than 14% of the company’s shares, separately came forward to voice their concerns about the deal and its terms since it was announced.
The increased bid “will likely be enough to get the deal over the finish line,” analysts from Stifel wrote in a note on Tuesday. But the richer offer wasn’t enough to sway Tarsadia Capital and SouthernSun Asset Management, two large shareholders that first voiced their opposition to the deal in March.
Tarsadia said it continues to have serious concerns about the sale process, which was not designed to elicit the highest bid for the company or create competition for Blackstone and Starwood. The firm noted that both ISS and Glass Lewis concluded there were serious flaws with the process, valuation and timing of the deal.
“A $1 bump in price is a small Band-Aid that cannot cure a fatally flawed process,” Tarsadia, which owns a 3.9% stake in the company, said in a statement urging shareholders to vote against the deal. “The updated offer announced today, representing just a 5% increase over the previous price, is nothing more than an attempt to jam through a transaction that still significantly undervalues the company.”
Phillip Cook, a principal at SouthernSun, said in an email the revised offer “falls well below” what he believes the company is worth on a standalone basis. It also fails to address the flawed sales process, he said.
SouthernSun owns a 1.75% stake in Extended Stay, according to data compiled by Bloomberg.
“Based on 32 years of investing in public markets, we believe this transaction and the process undertaken by the board represents one of the more egregious examples of poor corporate governance,” Cook said.
Extended Stay, which operates 650 mid-priced hotels, provides longer-term stays to construction crews, emergency responders and cost-conscious corporate workers. That focus helped the company record a system-wide occupancy rate last year of 74%, compared with 44% across the U.S. hotel industry.
Both of the private equity firms have experience with Extended Stay. Blackstone acquired the hotel company in 2004 and sold it three years later. It was also part of a group that bought Extended Stay out of bankruptcy in 2010 and eventually took it public.
Starwood, meanwhile, disclosed last April that it had spent $137 million building a stake in Extended Stay. It owned 9.4% of the company on March 15, the day the initial deal was announced.
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