LaSalle Hotel Properties and Pebblebrook Hotel Trust officials quickly reached a definitive merger agreement after Blackstone officials waived a four-day period in which they could have countered Pebblebrook’s latest offer.
Editor’s note: This story was updated to include comments from C. Patrick Scholes, managing director of lodging, gaming and leisure equity research at SunTrust Robinson Humphrey.
REPORT FROM THE U.S.—The boards of both LaSalle Hotel Properties and Pebblebrook Hotel Trust have unanimously approved a definitive merger agreement, quickly following LaSalle’s announcement that Pebblebrook’s offer to purchase the company was a “superior proposal” to their previous deal with Blackstone Real Estate Partners VIII.
LaSalle’s board announced its decision through a news release Wednesday afternoon, stating its board members unanimously (minus trustee Stuart Scott, who has been in the hospital) determined Pebblebrook’s latest offer a “superior proposal” as defined in LaSalle’s merger agreement with affiliates of Blackstone Real Estate Partners VIII.
Pebblebrook has pursued LaSalle for months after making its initial offer to merge with LaSalle in March. In its latest proposal, Pebblebrook offered to acquire LaSalle with consideration of 0.92 common shares of Pebblebrook per common share of LaSalle, giving LaSalle shareholders the option to receive a fixed amount of $37.80 per share up to a maximum of 30% in aggregate of the consideration.
In joint release issued Thursday morning, the two hotel real estate investment trusts announced they now have an agreement in place with a total value of $5.2 billion and the price paid by Pebblebrook represents a 48% premium on unaffected share price.
“This outcome represents the culmination of a thorough strategic alternatives process, which from the beginning, has been focused on maximizing value for shareholders,” LaSalle’s President and CEO Michael Barnello said in the release.
LaSalle had previously agreed to Blackstone’s all-cash offer of $33.50 per share valued at $4.8 billion. LaSalle shareholders were scheduled to vote on the deal today. That vote had been cancelled, and Blackstone waived the four-day period to amend its offer to LaSalle. Blackstone is set to receive a $112 million break-up fee.
In a note to investors issued before Wednesday’s announcement, Michael Bellisario, VP of equity and research senior analyst at Baird, said Pebblebrook could ultimately be paying 40% of the deal in cash when factoring in the cost of the 9.7% stake the company bought in LaSalle through the course of the pursuit.
“While Pebblebrook's most recent proposal affords LaSalle's shareholders to elect up to 30% of the merger consideration in cash, Pebblebrook already owns 9.7% of LaSalle's fully diluted shares, which was funded with incremental borrowings; as such, nearly 40% of the merger consideration could be in the form of cash at a blended price of $36.46 per LHO share,” he wrote.
In an interview with Hotel News Now yesterday, Pebblebrook EVP and CFO Raymond Martz said shareholders’ positive reaction to Pebblebrook’s offers was instrumental in getting a deal done.
“I think it’s clear the market has spoken,” he said. “The shareholders have spoken. We have great momentum here.”
In a follow-up note issued Thursday morning, Bellisario noted Blackstone isn’t the type of company to get drawn into a back-and-forth bidding war that would blow up the newly minted Pebblebrook-LaSalle deal.
“We believe Blackstone is unlikely to raise its bid by a large enough increment (if at all) to cause LaSalle's board to determine that Pebblebrook's offer no longer constitutes a ‘superior proposal,’” he wrote.
As for how Pebblebrook will respond if Blackstone comes back with another offer, Martz said Pebblebrook will evaluate it, but wouldn’t say more as the company can’t negotiate against itself.
As of press time, LaSalle’s shares were trading at $34.95 with a market cap of $3.86 billion, while Pebblebrook shares were at $37.50 with a market cap of $2.59 billion.
C. Patrick Scholes, managing director of lodging, gaming and leisure equity research at SunTrust Robinson Humphrey, said that all signs now point to the Pebblebrook-LaSalle deal going through as currently constructed. The two companies must seek shareholder approval of the deal within the next 90 days, but Scholes said he’s heard only positive investor feedback.
“All the investors I’ve talked to seem to have favored Pebblebrook (over Blackstone) all along,” he said.
Scholes noted it’s highly unlikely Blackstone comes back with another offer at this point, as that company seems content to walk away with the breakup fee from the earlier deal, and he would be “shocked” if another company comes in at this point to disrupt the current deal before it closes.
The next stage will be for Pebblebrook officials to deliver on their promise to better manage the LaSalle portfolio, but Scholes said their track record inspires confidence.
“Now they’ve got to execute,” he said. “But they’ve got a great reputation for being a strong management team, and there’s a good chance they will execute.”
One of the concerns for the company will be an elevated level of debt on the books, particularly at what’s assumed to be late in the current lodging cycle.
“Large acquisitions late in the prior cycle didn’t work out well, at least initially for those companies,” Scholes said. “(And leverage) is a concern. But while I’m not necessarily confident in the track record of the U.S. economy, I’m confident in the track record for Pebblebrook’s management team.”