Blackstone Group's $2 billion buyout of
Extended Stay America
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.
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
, which owns about 110 hotels baring a variety of brands, and
FelCor Lodging Trust
, 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
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.