US: Extended Stay America has written to shareholders, addressing what it calls “misleading and highly flawed arguments” against the sale of the company.
The $6 billion proposed sale to a JV of Starwood Capital and Blackstone has received all regulatory approvals and will close on June 11, pending shareholder approval. The letter urges shareholders to vote to approve the transaction at the company’s special meeting of shareholders scheduled for June 8.
The company announced the acquisition agreement on March 15, since when several major shareholders and two board directors have expressed their opposition to the sale.
Tarsadia Capital, one of ESA’s largest shareholders with around 3.9 per cent of the REIT’s shares, has filed a preliminary proxy statement to solicit votes against the proposed sale.
ESA says the letter provides “a comprehensive discussion of the history, and the compelling strategic and economic rationale for the transaction”.
It addresses objections to the proposed sale price, the way the sale has been conducted and its timings.
It says: “At $19.50, the transaction values the company’s paired shares at more than a 50 per cent premium to their pre-pandemic price, and at a 15.6x trailing 2020 EBITDA multiple, 13.0x forward 2021E EBITDA multiple and 11.0x pro-forma 2019 EBITDA multiple, compared to its one-year pre-COVID average next twelve month multiple of 9.1x. Further, since the sale transaction announcement on March 15th, the lodging sector has traded down 9.5 per cent implying an even greater transaction premium amidst an increasingly more volatile market.”
“The transaction marks the culmination of the company’s thorough, multi-year actions to explore value-enhancing alternatives, during which time only Blackstone and Starwood emerged as interested parties despite proactive outreach to others and the Company’s publicly acknowledged ‘strategic review’ process in 2019. Rigorous negotiations driving five price increases over two months resulted in $19.50 as the buyers’ ‘best and final’ offer,” it adds.
Addressing the timing of the sale, the letter says: “The company’s unique extended stay business model and recently implemented strategic initiatives led to significant operating and share price outperformance during the pandemic. The transaction comes at a time and at a valuation such that the future upside expected in the Company’s five-year business plan, which projects 2023 EBITDA to exceed 2019 by approximately 10 per cent, is reflected in the transaction price on a time and risk-adjusted basis.”
Addressing Tarsadia Capital’s concerns specifically, the letter says: “Tarsadia is focused on an agenda of ill-advised alternatives for the company: After nine months of engagement, Tarsadia has offered no new and credible ideas for value creation, and instead has focused on ill-conceived and even irresponsible ideas of levered share repurchases and variations on OpCo/PropCo that bear no merit.”
It adds that Tarsadia’s valuation claims are “flawed and hypocritical” while its claims that the two dissenting directors were “ignored” and “brushed aside” are “patently false”.
