Fool me once, shame on you. Fool me twice, shame on me. But who is culpable in the third instance? In March, US lodging chain Extended Stay America announced that it would be acquired by a partnership that included Blackstone for $6bn.
It felt like deja vu as the largest real estate investor in the world had, over the past 18 years, twice previously acquired, and then flipped the company that effectively is an apartment building and motel hybrid.
Despite Blackstone netting billions from its previous stints, Extended Stay has hardly been a high flier since. The deal price of $19.50 is below the company’s initial public offering price from 2013 when Blackstone had listed it. The premium over the company’s previous share price before the offer is just 15 per cent. And most curiously, it seems like an odd moment for a hospitality company to be selling itself just as the pandemic eases.
Unsurprisingly, within weeks, an investor revolt erupted. Tarsadia Capital, which owns 3.9 per cent of Extended Stay, has waged a public proxy fight to rally other shareholders to vote down the deal, arguing that “the timing of the sale is wrong” and “the price of the sale is wrong.”
The firm, which invests on behalf of a family office, had been talking for months to the company about strategy and was in the process of nominating its own slate of directors to the board when it was blindsided by the sale announcement.
A shareholder vote is set for June and the proxy advisors firms have yet to render their crucial verdicts. The company’s share price had traded above the deal price by a sliver and the Tarsadia frustration is understandable.
Extended Stay has proven that it is not a great public company. But simply handing the keys to a canny operator at a mediocre price just as management had even been talking up a turnaround must not feel good.
Blackstone and Starwood Capital each had expressed interest in buying Extended Stay in 2017 at prices above $20 per share, according to securities filings.
Blackstone had first bought the company for $3bn in 2004 and then smartly sold it to another private equity firm in 2007 for $8bn. The company promptly went bankrupt as a result of the financial crisis and heavy leverage. Blackstone then led a group to buy it out of bankruptcy in 2010 for $4bn. In 2013, Extended Stay listed its shares again at a valuation of $8bn.
Extended Stay is unique in that more than 40 per cent of its guests book for more than 30 days and, rather than tourists, its customers are travelling consultants, nurses and the like.
In the years before the pandemic, various financial engineering strategies were considered to boost value along with the bids that came in from Blackstone and Starwood above $20 per share which were rejected.
During the pandemic, Extended Stay had been resilient since it relied less on leisure travellers. Between the start of 2020 and March 1, 2021, its shares were up 14 per cent while Marriott shares were flat. The company chief executive noted in a late February earnings call that occupancy rates were relatively high and that Extended Stay would “not only return to 2019 [revenue per room] levels well before the industry but also exceed those levels”.
Days later, the company announced the sale to Blackstone which was partnering with Starwood. The same CEO has said the deal “reflects the value upside inherent in our strategic initiatives while eliminating market and execution risk”. Securities filings reveal that Extended Stay management was worried that the company’s capital expenditure needs (average age of its more than 500 hotels is 20 years) could be higher than projections had budgeted.
Naturally, Tarsadia and others have seized on the seeming inconsistency between the pre-deal optimism and the current resignation. Unusually, two members of the Extended Stay board voted against the transaction. One dissident director thought it was the wrong time to sell the company and the other believed the 15 per cent premium was too skinny. If two insiders would not get behind the deal, the company naturally should expect outsiders to shake their heads.
Earlier this year, hedge funds successfully forced another top private equity firm, Vista, to bump up 11 per cent a cheap bid for a multi-billion dollar software company. Blackstone and Starwood are not pushovers, yet they also have piles of cash they need to put to work. It may be that their greatest skill is figuring out just exactly what price it takes to win 50.1 per cent of the vote and not pay a penny more. It will be interesting to watch if Blackstone can strike gold and nail the trifecta. But even getting that chance is not yet guaranteed.