Blackstone and Starwood Capital's extra $180 million sweetens the pot for the planned Extended Stay America takeover, but this is no done deal. There is still a very loud opposing group of shareholders that could sway the vote this week.
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An extra $1 per share offer in Blackstone and Starwood Capital’s planned Extended Stay America acquisition may not completely win over shareholders, but it should be enough to get the job done.
The two investment firms upped their bid last week in the quest to jointly take over the largest extended-stay hotel brand in the U.S. Shareholders convene Tuesday on whether to approve the deal, and signs are pointing to this deal moving forward. A final vote is scheduled for Friday.
Two directors of Extended Stay’s ESH Hospitality real estate trust board who criticized the initial Blackstone-Starwood bid as too low are now backing the move. Advisory firm Institutional Shareholder Services, which issued a scathing report against the deal late last month, changed its tune last week.
The new offer adds $180 million to the initial roughly $6 billion offer, according to Rob Ballew, Extended Stay’s vice president of finance and investor relations, via email.
“In addition to the unanimous support of our boards, we are also pleased to note that the transaction is now supported by a number of our large shareholders who had previously expressed concerns,” Extended Stay America CEO Bruce Haase said in a statement.
Zimmer Partners, which owns shy of 5 percent of Extended Stay America, dropped its opposition to the deal and plans to vote in favor of the deal, according to sources close to the vote.
Not Out of the Woods: At one point, opposition mounted from leading shareholder groups like family wealth fund Tarsadia Capital, which has a nearly 4 percent stake in the company. Other opposing shareholders included private equity firm Hawk Ridge Capital, which has about a 2 percent stake, as well as SouthernSun Asset Management LLC, River Road Asset Management, and Cooke & Bieler LP.
These organizations felt the timing of the deal was poor and initial offer too low given Extended Stay’s relatively strong performance through the pandemic and potential upside during the recovery. Even with the infusion of additional capital, Tarsadia isn’t changing its tune.
“A $1 bump in price is a small Band-Aid that cannot cure a fatally flawed process,” Tarsadia said in a statement. “The updated offer announced today, representing just a 5 percent increase over the previous price, is nothing more than an attempt to jam through a transaction that still significantly undervalues the company and was the result of a process that was not designed to elicit the highest bid for [Extended Stay America] or create competition for Blackstone and Starwood.”
Mixed Messaging: Analysts appear split on the shareholder vote.
A Stifel note from last week noted the $1 per share increase was likely enough for the deal to clear this week’s shareholder vote hurdle.
Baird has a neutral take on the deal, noting early last week the deal could very much still get voted down and that the stock market appeared to be “pricing in some probability that the deal gets voted down.”
Jeffries was the most bullish of the analyst teams and cautioned a failed vote could lead the company’s stock price, trading just over $20 per share Friday afternoon, to plummet temporarily below $15 per share.
China’s Hotel Room Development Pace Hits 12-Year High
The pandemic’s catastrophic impact on hotel performance hasn’t deterred developers from building more rooms across China.
While the number of hotels in the country’s construction and development pipeline is down by 3 percent, the 656,828 rooms is up 2 percent from last year and the most seen in 12 years, according to Lodging Econometrics. More than 425,000 of those rooms are currently under construction.
The robust development pace comes as China’s domestic travel demand pushed the country into a nearly full recovery. Marriott reported business travel demand in China for the month of March eclipsed 2019 levels by 5 percent. Shanghai-based Huazhu — which has nearly 7,000 hotels across brands like Joya and HanTing in China as well as Steigenberger Hotels in Germany —was running 7 percent above 2019 levels last month, the company reported on an investor call.
China administered about 511 million vaccines as of May 23, according to the Lodging Econometrics development pipeline report. That is a major driver in the country’s hotel recovery as well as developer and investor interest.
“As the vaccination process is taking place smoothly in China, we are confident that China’s economy will further recover from the pandemic and drive the growth of business travel,” said Qi Ji, Huazhu’s founder and CEO, on the company’s investor call late last month.
A Branded Boom: Chengdu, Shanghai, Guangzhou, Wuhan, and Xi’an were the top cities for hotel development in China at the end of the first quarter. The world’s largest hotel companies are behind a bulk of the hotel room development, with Hilton in the lead.
Hilton has 601 hotels, with a combined 116,446 rooms, in various stages of development. The company’s Hampton brand is at an all-time development high with nearly 53,000 rooms across 347 projects in development. Hilton Garden Inn is also at a record high for development in China with nearly 17,000 rooms across 77 projects.
Hilton also has a development agreement with property developer Country Garden to build more than 1,000 Home 2 Suites properties across the country.
Hilton CEO Christopher Nassetta indicated on an investor call early last month the company was likely to put a greater emphasis on growth in Asia in the next few years while development cooled in the U.S. due to a variety of factors like rising construction prices and tighter construction lending. That would also enable U.S. hotel owners to regain some pricing power during the recovery from the pandemic.
“I suspect you will see a cycle where, particularly in the U.S., the new construction numbers are going to be much, much lower,” Nassetta said. “That’s obviously long-term healthy for the for the industry. But the good news for us is the world’s a big place, and the pressures are not the same in all places in the world, particularly recognizing that the place where we have the second-biggest chunk of our growth is Asia.”
IHG comes in second for property volume in China with 439 projects in development with a combined 92,738 rooms. IHG’s top brands in China include its Holiday Inn and Holiday Inn Express franchises.
Marriott placed second in terms of room count, with 388 projects in development with a combined 105,290 rooms. The world’s largest hotel company’s top brands in development in China include its eponymous hotel and resort brand as well as Four Points.
Watch Out, Soho House
Rosewood Hotel Group is the latest hospitality group to signal growth opportunities in members-only clubs coming out of the pandemic. The Hong Kong-based hotel company is expected to open Monday a private membership club, Carlyle & Co., overlooking Victoria Harbor.
“The idea is we would like to develop a new breed of private member clubs that is not about whether you’re part of a certain profession or certain group or certain social circle or having a certain income,” Rosewood Hotel Group CEO Sonia Cheng told Bloomberg.
Joining fees for the new membership club still aren’t for everybody. Those alone come in around $11,300, and there’s an annual fee that wasn’t disclosed.
Why Now: It may seem like a bit of a head-scratcher to open a members-only club amid a pandemic that is still under way and taking an even greater toll on Hong Kong than markets in Mainland China. But the hospitality world continues to show investors like the idea of this exclusive business model.
“More and more companies and groups are very eager to explore and expand the membership concept. It’s all been fueled by the pandemic and how that has impacted how we live, work, and play,” Gilda Perez-Alvarado, global CEO of JLL Hotels & Hospitality, told Skift earlier this year. “Maybe you travel to a certain city where there’s an exclusive space you can stay that’s giving you a more residential and very personal approach service. That’s the winning formula going forward.”
Hotelier Andre Balazs announced plans last year to convert the Chateau Marmont in Los Angeles to a members-only model. The global membership club chain Soho House filed confidentially this spring to go public on the New York Stock Exchange. That deal could value the company at as much as $4 billion.
Despite the pandemic leading to temporarily suspended operations at many of its 27 clubs and layoffs of 1,000 staffers, Soho House was also somewhat of a resilient entity during the last year. Only about 10 percent of the company’s 110,000 members cancelled their memberships during the public health crisis.
“Because of the pandemic, people are longing to be connected with a community,” Cheng said of Rosewood’s members-only club ambition.
Assuming the Hong Kong Carlyle & Co. club is a success, Rosewood plans to open a second within a year-and-a-half. There is “dialog” regarding locations around the world. London, Beijing, Shanghai, and Paris are all possibilities for future locations, Cheng said.
[CORRECTION]: Shareholders for the Extended Stay America deal convene Tuesday with respect to the takeover, but a final discussion and vote isn’t expected until Friday. This story has been corrected to reflect that timeline.