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Deal Could Signal More Hotel Buyouts

The $19.63-a-share takeout price is fairly rich for a chain whose stock made its debut in 1995 only 16% below its current level, split adjusted. The company has piled on properties at a much better clip than revenue: it went from 392 to 472 in the three years ending in 2003, a period during which revenue rose only 6%. Extended Stay earned $40.4 million in 2003, off 29% from the prior year.

The lackluster performance was reflected in ESA's share price in 2003. While the Dow Jones Hotel and Lodging Index racked up a 50% gain last year, ESA shares fell 1.8%.

But given Blackstone's experience in the sector, the hope is that the sum of the parts it has collected will be worth a more than the premium it paid.

"We are excited to be acquiring Extended Stay America," said Stephen Schwarzman, president and CEO of the Blackstone Group. "This transaction will benefit from our long track record and existing expertise in the hotel sector, which augurs well for the future of the company."

But by paying up for ESA, said Citigroup Smith Barney analyst Michael Reitbrock, Blackstone is also sending a message that other publicly traded hotel stocks are not overpriced, given ESA's recent underperformance.

"The fact that a sophisticated, long-term investor is willing to pay a significant premium to market valuation and to 'look through' high current valuations will ease investor concerns that the stocks are 'ahead of themselves.' And the deal may set off a small wave of acquisition speculation," he said in a research note.

That speculation could bear out in a deal or two, Reitbrock said, but he doesn't see the Blackstone move on Extended Stay as part of a larger wave of industry consolidation. The two hotel chains that trade at the largest discount to net asset value, according to Reitbrock, are MeriStar Hospitality (MHX), which owns about 110 hotels baring a variety of brands, and FelCor Lodging Trust (FCH), which owns 160 multibrand hotels and failed to acquire MeriStar in 2001. Of the large-cap names, both Reitbrock and Fulcrum Global Partners' analyst Joseph Graff said that Hilton Hotels (HLT) would appear to have the most upside if ESA's transaction multiple were applied to earnings estimates.

The ESA buyout had hotel investors in a speculative mood. The Dow Hotels were up 2.8% by Monday afternoon, led higher by ESA and hotel names mentioned in analyst reports. MeriStar gained 73 cents, or 11.7%, to $6.98, while FulCor rose 37 cents, or 3.5%, to $10.93. Hilton was the large-cap leader, up 61 cents, or 3.8%, to $16.57.

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