LaSalle takeover: The drama continues
 
LaSalle takeover: The drama continues
03 JULY 2018 7:13 AM

Unless LaSalle accepts Pebblebrook’s offer or Blackstone raises its offer, LaSalle faces an uncertain shareholder vote. How does the Pebblebrook-LaSalle takeover drama end? Most likely with one large public hotel REIT called Pebblebrook.

While Blackstone is under contract to acquire LaSalle Hotels Properties, in the end I don’t think that deal is likely to close. Rather, I see three scenarios that would result in Pebblebrook Hotel Trust completing an acquisition of LaSalle.

But don’t shed any tears for Blackstone if their deal doesn’t close, as they will earn a tidy breakup fee, $112 million, if LaSalle enters into a definitive agreement to be acquired by another bidder before its shareholder meeting or within 12 months of termination of the merger agreement following an unfavorable shareholder vote.

For full disclosure, I am a member of the board of CorePoint Lodging, a company in which Blackstone is an investor. Two Blackstone representatives also serve on that board. However, I have no knowledge of Blackstone’s plans or intentions regarding LaSalle.

Where are we now?
LaSalle has turned down Pebblebrook’s offer, arguing that a cash transaction is better than one that offers 80% stock. They have a point with that conclusion, but only in the general sense.

LaSalle’s board must weigh the long-term value of the alternatives and pick the one with the highest value, and the value of cash is much easier to determine than the present value of Pebblebrook’s stock in the future. Of course, the market price at any point in time is a reflection of just that, the present value of what investors believe Pebblebrook’s stock is likely to be worth in the future. At the end of June, with Pebblebrook shares trading at $38.80, its offer would be worth $36.16, assuming all investors except Pebblebrook take 20% cash; if fewer want cash, the value of the offer is higher. This represents a 7.9% premium over Blackstone’s offer.

However, in this case, price risk around Pebblebrook’s stock may be less relevant as many shareholders are likely to prefer stock, which means more cash will be available to investors looking for cash, and the liquidity of Pebblebrook’s shares means investors can quickly turn that stock into cash. While Pebblebrook has offered up to 20% of the total value of its offer in cash, we can be certain that not all shareholders will want cash. Pebblebrook would have no reason to take cash from itself for the 9.8% of LaSalle’s shares it owns; and some investors, like index funds or those who want to avoid a taxable gain on the transaction, are also likely to want most or all stock.

Plus, most investors who want cash can sell Pebblebrook shares short (sell borrowed stock) and cover (return the stock) with the stock they get upon a transaction closing, locking in Pebblebrook’s stock price at the time of that short sale transaction. It appears that many investors have done just that, since 15.6% of Pebblebrook’s shares have been sold short as of 15 June.

As the stock fluctuates, so will the value of the Pebblebrook offer, with the cash somewhat limiting the volatility if the stock is trading for less than $41.09. Above $41.09, the price Pebblebrook used to calculate the guaranteed cash portion, investors would most likely take 100% Pebblebrook stock, even if they planned to sell the stock, as it would be worth more than the cash portion.

Where do we go from here?
Unless LaSalle chooses to accept Pebblebrook’s offer, or Blackstone choses to raise its offer, the $33.50 cash offer will go to a shareholder vote. LaSalle needs approval from two-thirds of all its shares outstanding.

There are several ways to gauge the likelihood of that happening.

Pebblebrook is almost certain to vote its 9.8% holding in LaSalle against the Blackstone offer. As long as Pebblebrook’s share price is over $35.24, the price at which its offer equals Blackstone’s offer, other investors are likely to vote against the offer, including activist HG Vora, owner of 9.1% of LaSalle’s shares, which has publicly encouraged LaSalle’s board to accept Pebblebrook’s offer. Some investors won’t vote and some investors who have the chance to vote might have sold their shares after the record date of the vote but before they vote their proxies.

As Pebblebrook points out in its presentation, through 26 June, 92% of LaSalle’s shares outstanding have traded above the Blackstone deal price, indicating that a lot of investors have acquired shares with an expectation of an outcome exceeding the $33.50 offer.

What are the scenarios that could result in a Pebblebrook acquiring LaSalle?
First, LaSalle could accept Pebblebrook’s latest offer or perhaps a slightly sweetened offer prior to a shareholder vote. In that case, Blackstone gets its fee. Given the risk of the shareholder vote failing, this seems like a realistic alternative.

Second, shareholders could not approve the Blackstone offer, and in the aftermath of that vote, LaSalle’s board could negotiate a transaction with Pebblebrook. One risk to LaSalle and its shareholders is that Pebblebrook’s negotiating position would be dramatically enhanced. Again, Blackstone gets its breakup fee.

Finally, shareholders could not approve the Blackstone offer, and LaSalle could choose to remain independent. If this happens, activists would be likely to propose a new slate of directors, and LaSalle’s shareholders might be likely to embrace change, which could ultimately lead to a management change at LaSalle and a new board negotiating a merger with Pebblebrook.

LaSalle’s motivations are hard to read. Its board must act in the long-term best interests of its investors. Its management will almost certainly not want a negative shareholder vote or a costly and distracting proxy fight. And if management is ousted without a change of control or prior to a change of control, severance payments are substantially lower than they would be following a change of control.

One can more easily draw conclusions about Blackstone’s interest. Clearly, it would like to acquire LaSalle at $33.50. It may or may not want to raise its bid, but if LaSalle terminates its agreement with Blackstone, it would be in Blackstone’s interest to receive the termination payment sooner rather than later (as in the first or second scenario), and it would not be in its interest to see no takeover for LaSalle in the 12 months following a failed shareholder vote, as it would get no breakup fee at all.

Might Pebblebrook raise its bid? If LaSalle proceeds with a vote on Blackstone’s bid and the vote fails, would Pebblebrook offer a lower bid? Only time will tell.

But my expectation is that in the end Pebblebrook completes an acquisition of LaSalle.

After a 30-year career as a stock research analyst, David Loeb created Dirigo Consulting LLC, which advises on capital markets, strategy and communications issues. Clients have included REITs, brands, and private equity investors. He a member of the board of directors of CorePoint Lodging Inc., a publicly traded hotel REIT. He can be reached at davidloeb@earthlink.net.

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