Extended Stay America's significant hotel ownership, an industry anomaly these days, drove it to sell, or at least that was the C-suite argument. Buildings are getting old and need a lot of money to renovate. Major shareholders aren't buying that argument.
Blackstone and Starwood Capital’s earlier respective bids for Extended Stay America are the latest examples of why shareholders — and even two board members — aren’t satisfied with the $6 billion joint acquisition’s price tag.
While Blackstone and Starwood are acquiring Extended Stay America as partners, the companies have been independently interested in a deal as far back as 2017, according to a filing this week with the U.S. Securities and Exchange Commission. Multiple earlier bids would have eclipsed the pair’s current $6 billion, or $19.50, per share deal.
News of the higher bids is the latest revelation following weeks of major shareholders voicing opposition to the current bid, as they felt it was too low.
“We are dismayed that the board would approve such an obviously inadequate price and shocked that the board did so over the objection of two of its own members,” said a spokesperson for Tarsadia Capital, a family wealth fund that has a nearly 4 percent stake in Extended Stay America.
The SEC filing also revealed two members of Extended Stay America’s real estate trust board, Neil Brown and Simon Turner, also opposed the acquisition for the same reason. Brown specifically thought the timing of the deal was bad, as travel stocks were beginning to rebound.
Why take a deal suddenly after years of stalled negotiations? Extended Stay America’s 564 hotels were aging — the buildings are roughly 21-years-old on average — and would likely require significant investment to modernize, the company’s CEO Bruce Haase argued in March, per the filing.
But it wasn’t that long ago when higher bids were discussed.
Starwood expressed potential of a bid between $22 and $24 per share in July of 2017. By mid-September of that year, the investment firm later dropped interest, telling Extended Stay America’s team they were unable to provide a premium over the then-trading price of $20.20 per share.
The investor interest spurred Extended Stay America to seek additional offers over the summer of 2017 from other groups like Blackstone, but the hotel company’s third quarter earnings didn’t meet analyst expectations. The stock price fell to $17.23 per share in early November.
Blackstone still made an offer of $19.50 per share three days after Extended Stay America released the lower-than-expected earnings. The investment firm later increased its bid to $20.75 per share, but Extended Stay America’s rejected the proposal for being too low.
Extended Stay America continued acquisition talks into 2018 and 2019 with Blackstone as well as two unnamed hotel companies, according to the filing. The hotel companies were only interested in branding and management deals and were floating various offer scenarios all below $1 billion, as most hotel companies don’t actually own much real estate.
Extended Stay America — through its ESH Hospitality lodging real estate trust — owns 564 of its hotels, which is a major driver in the $6 billion acquisition price.
While the hotel companies eventually walked away from negotiations, Starwood returned in 2020 when it was revealed it, along with Blackstone, had smaller stakes in the company and were drawn to it for its resilience in the early days of the pandemic. The two eventually partnered on what became their joint $6 billion bid.
Tarsadia and private equity firm Hawk Ridge Capital, which has about a 2 percent stake, still opposed the deal. Other shareholders like SouthernSun Asset Management LLC, River Road Asset Management, and Cooke & Bieler LP later joined in the opposition, citing bad timing and a lowball offer.
Tarsadia repeatedly tried in recent years to advise Extended Stay America’s leadership team on restructuring the company, including holding onto the hotel management and branding business — how most hotel companies operate these days — and spin off the real estate trust into a company run by the same executives in charge of the standalone hotel company.
Extended Stay America management declined that plan due to the “significant conflicts of interest” it would create.
U.S. hotel stocks have generally been on the rise, buoyed since winter on optimism around accelerated vaccine distribution and the growing notion summer travel demand will be well above expectations from just weeks ago. Extended Stay America was trading at $19.87 per share, above the Blackstone and Starwood offer price, early Thursday afternoon.
Turner was opposed to any offer less than $20 per share, according to the filing. That echoes Tarsadia concerns from last month.
“With a clear economic and earnings recovery trajectory, [Extended Stay America’s] stock is highly likely to participate in this cyclical updraft,” Tarsadia wrote in a letter to other Extended Stay America shareholders. “Given the strategic value of ESA to Blackstone and Starwood – both of whom own assets that can be readily combined with ESA’s lodging assets – and the potential cost savings and revenue synergies, a transaction with these parties should come in-line or at a premium to multiples observed in the lodging [mergers and acquisitions] market, not at a material discount.”
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Photo credit: Extended Stay America flirted with better offers in recent years from the same two companies now on track to take over the company. Chris Hunkelar / Flickr