Tarsadia Capital, a 3.9 percent shareholder in Extended Stay America, plans to vote against the proposed $6 billion sale of ESA to Blackstone Real Estate Partners and Starwood Capital Group, the company announced in a letter sent Monday to fellow ESA shareholders. Hawk Ridge Capital Management, which has about a 2 percent stake in ESA, also plans to vote against the deal, according to Bloomberg.
Tarsadia gave two reasons for its opposition to the $19.50-per-share sale: pricing and timing, according to the letter, a copy of which BTN obtained. The company is “gravely disappointed” to see ESA sold for a “grossly inadequate price” that “the board accepted after its seemingly hasty negotiations.” The letter implied the deal came together in less than five weeks.
If the sale goes through as proposed, it would “conclude ESA’s more than seven years as a public company at a price below its original IPO price,” according to the letter, which added that on a forward EBITDA basis, the proposed price is the lowest transaction multiple in the U.S. lodging space in more than five years.
The letter also noted that ESA has been a big disappointment to public-market investors since its IPO, as it has “cycled through executive teams, operational strategies and strategic reviews, all while significantly underperforming peers.” But Tarsadia doesn’t believe that underperformance was inevitable or that it must persist. “ESA owns some of the best hospitality assets in the country and should generate excellent shareholder returns from those assets.”
The timing comes as “hotel companies are just emerging from the worst downturn the industry has ever seen,” according to the letter. “This year will be the first year of a new lodging cycle, which has historically been the most attractive time to invest in lodging stocks. In the prior 2001 and 2009 lodging recessions, after the one-year anniversary of a [revenue per available room] trough, the three-year average lodging stock total shareholder returns were 124 percent (2002 to 2005) and 59 percent (2010 to 2013). With a clear economic and earnings recovery trajectory, [ESA’s] stock is highly likely to participate in this cyclical updraft.”
Tarsadia added that the company several months ago had engaged with ESA to help it optimize its strategy, corporate structure and board of directors. It has nominated three independent executives to the board: former Choice Hotels CEO Stephen Joyce, former RLJ Lodging Trust CEO Ross Bierkan and former Las Vegas Sands president and CEO Michael Leven.
“Perhaps this disappointing transaction is the result of the incumbent board attempting to sidestep accountability for the company’s many years of underperformance right before the start of a proxy contest,” the letter continued.
The timing of the ESA sale comes not only as the lodging industry is poised to begin its recovery, but also after the extended-stay segment proved relatively resilient during the pandemic. Though not a direct comparison with other hotel types, the segment did report some of the highest occupancy rates in the industry, and The Highland Group indicated 2020 segment RevPAR declined 33.4 percent year over year, compared with what STR indicated was a 47.5 percent decline for the U.S. hotel industry as a whole.
ESA did not immediately respond to a request for comment.