Deal Could Signal More Hotel Buyouts

Blackstone Group's $2 billion buyout of Extended Stay America (ESA) could bode well for a couple of other hotel sector laggards.

ESA's board has unanimously approved the deal, which valued one share of ESA at $19.63 a share; they were up 22% to $19.30 in heavy volume Monday. The New York private equity group also will assume $1.13 billion in debt.

"The board is pleased with the terms of this acquisition and believes it is in the best interests of the company's shareholders. Blackstone has a proven record of accomplishment in the extended stay segment," said George Johnson, Jr., ESA's CEO.

Blackstone, a $14 billion private equity firm, has made other forays into the extended-stay market, which caters to corporate executives on long assignments and relocated employees in need of temporary housing.

In November 2001, Blackstone bought the 130-hotel Homestead Studios extended-stay chain for $740 million and had invested in a variety of upscale hotels prior to that, like a 1998 purchase of the Savoy Group and a 1999 purchase of 40 hotel properties from Vivendi.

The going-private transaction will be effected through two funds: Blackstone Capital Partners IV and Blackstone Real Estate Partners IV. The former is famous as the biggest private equity fund ever set up. The financing will be detailed in a merger agreement due out later Monday, although it is known that Bank of America and Bear Stearns put it together. Bear also advised Blackstone on the deal. Morgan Stanley advised ESA on the deal.

The merger is subject to shareholder approval, but once completed, Homestead Studios will manage ESA's portfolio of hotels. Bear Stearns estimated that the combined companies could see upwards of $20 million in cost-savings and will immediately make Blackstone one of the biggest players in the extended-stay space.