Extended Stay America and its paired-share real estate investment trust ESH Hospitality first had discussions individually with Blackstone Real Estate Partners and Starwood Capital Group about a possible acquisition of the company as early as 2017, according to a preliminary proxy statement filed April 13 by ESA with the U.S. Securities and Exchange Commission. The statement follows last month’s announcement that Blackstone and Starwood would acquire ESA in a 50/50 joint venture for $19.50 per paired share in an all-cash transaction valued at approximately $6 billion.
Some shareholders voiced disapproval of the sale, with Tarsadia Capital sending a letter to fellow shareholders citing pricing and timing as reasons for their planned vote to decline the deal. The preliminary proxy statement also showed that two of the REIT’s board members opposed the transaction. At least one law firm, Kaskela Law, is conducting an investigation into the ESA board to determine whether the proposed $19.50 per share offer provides sufficient consideration to ESA shareholders, and whether ESA’s officers and/or directors violated the securities laws or breached their fiduciary duties in agreeing to sell the company to Blackstone and Starwood, according to Kaskela’s website. As of Wednesday’s close, ESA’s shares were priced at $19.81.
ESA has received no further outreach from shareholders since filing the proxy, and the company is not worried about the investigation, according to a source familiar with the situation. Further, the source suggested ESA’s increased share price might be a function of the shareholders voicing displeasure with the transaction.
Acquisition Discussion has Years of History
The preliminary proxy statement details ESA’s history of acquisition discussions. After Starwood in July 2017 submitted an indication of interest to purchase ESA for a price in the range of $22 to $24 per paired share, ESA decided to explore potential third-party interest in an acquisition. Starwood by September 2017 indicated it would not proceed with a transaction in the range initially indicated, and ESA discontinued its process to find a buyer.
In November 2017, Blackstone made an unsolicited written proposal to acquire the company for $19.50 per paired share, representing a premium of 16 percent to the closing price of the paired shares on that date. The following month, it increased its offer to $20.75 per paired share, for a 16.4 percent premium. The share price at that time was $17.35. ESA decided to reject the proposal after determining it was not in the best interests of shareholders, and discussions with Blackstone were terminated. ESA’s president and CEO at that time resigned and was replaced.
In late 2018, two other unnamed parties expressed interest in acquiring ESA, and Blackstone resumed interest as well. Discussions with the latter ended by mid-February 2019 after its offer of $18.65 per paired share was declined by the board. Discussions with the two unnamed parties terminated later that year. In November, ESA’s president and CEO resigned and was replaced.
In April 2020, Starwood CEO Barry Sternlicht reached out to ESA board chairman and independent director Doug Geoga, indicating Starwood viewed the paired shares as undervalued. By August, Starwood disclosed ownership of about 9.4 percent of the paired shares. Following this, Tarsadia, an investment firm, presented ESA with multiple ideas, which included a management buyout, leaving a public REIT, and partnering with another company, such as Starwood. ESA executives over the next six months had “more than 20 calls and meetings with representatives of Tarsadia.” After consideration and discussion with ESA’s financial advisor Goldman Sachs, the company decided against the proposals.
Blackstone reached out to ESA again on Jan. 19, 2021, to express interest in a potential acquisition in the range of “$17 plus” per paired share, and noted that the company was working with Starwood, but that no agreement or understanding between Blackstone and Starwood had been reached. Several meetings and calls ensued that led to the announcement of the purchase agreement by the two companies on March 15.
Justification for the Deal
Despite some shareholder dissent and an increased share price since the deal was announced, ESA continues to support the proposed transaction. The preliminary proxy statement outlines its belief in the deal, stating that it provides immediate, certain and compelling value to shareholders, as well as superior value to the continued execution of ESA’s strategic plan on a time and risk-adjusted basis. It also noted that the company thoroughly explored other “value-enhancing alternatives.”
The offered price is a 51 percent premium to the company’s pre-pandemic share price, based on its weighted average price from Feb. 1-21, 2020, and a 15 percent premium on the $16.94 closing price the day prior to the announcement, according to the statement.
“The Blackstone/Starwood Capital transaction values our paired shares at more than a 50 percent premium to their pre-pandemic value and creates a compelling opportunity for shareholders to immediately realize the future benefits of our strategic initiatives,” said ESA president and CEO Bruce Haase in a statement. “I believe $19.50 per paired share reflects the value upside inherent in our strategic initiatives while eliminating execution and market risk.”
Some of that risk includes the potential for some of the expected recovery already being accounted for in ESA’s current share price, giving the company credit for initiatives it is still implementing, said a source familiar with the situation. “We’ve never been in a market as forward-looking as now,” the source added.
Capital investment is another concern. The company estimated it would need about $750 million over the next three years to maintain and renovate its real estate assets, which on average are more than 21 years old. This works out to approximately 20 percent of projected revenue over those three years. In addition, in recent years, traditional hotel companies have moved into the extended-stay space with new-build properties and refreshed products, and that competition factored into the equation, according to the person familiar with the situation.
Financial services firm Baird Equity Research in an April 13 report suggested ESA’s stock price wouldn’t maintain its level should the acquisition fail. “A deal that is voted down is a lose-lose-lose for shareholders, [ESA] board/management, and [Blackstone and Starwood],” according to the report. “All else equal, we believe [ESA] shares would trade back to the mid-$16 range.”