Pebblebrook Hotel Trust’s chances of reaching a deal to purchase LaSalle Hotel Properties have improved after some recent developments, analysts said, but Blackstone could still come back with a higher offer.
REPORT FROM THE U.S.—Persistence might actually pay off.
After months of revising an offer to purchase LaSalle Hotel Properties, executives at Pebblebrook Hotel Trust heard the news they have been waiting to hear. The LaSalle board of trustees voted to declare Pebblebrook’s latest offer potentially “superior” to its existing deal with affiliates of Blackstone Real Estate Partners VIII.
Pebblebrook first proposed a merger with LaSalle Hotel Properties in March and has pursued the company since, sweetening its bid several times after LaSalle announced in May a deal to be acquired by Blackstone. Each time, LaSalle’s board of trustees has unanimously rejected Pebblebrook’s mixed offer of cash and shares in favor of Blackstone’s all-cash offer of $33.50 per share.
A combination of events in recent days has tipped the scales in Pebblebrook’s favor, analysts said. Pebblebrook “enhanced” its offer last week for LaSalle’s shareholders, offering $37.50 in cash per share for up to 30% of LaSalle’s common shares in aggregate, which is an increase of 50% compared to the company’s previous offer. Days later, proxy advisory services firms Glass Lewis and Institutional Shareholder Services recommended LaSalle shareholders vote against the Blackstone deal.
The vote by the LaSalle board to give weight to Pebblebrook’s offer was the first positive result for the company since it began its bid, said C. Patrick Scholes, managing director of lodging, gaming and leisure equity research at SunTrust Robinson Humphrey. With that, and the recommendations of the proxy advisory services, there’s a high probability the Blackstone deal, scheduled for a vote on 6 September, will be rejected, he said.
“The big question is will Blackstone raise their offer and, if so, by how much, or do they just walk away?” Scholes said. “If they do raise their offer, what does Pebblebrook do in that scenario? Do they have to raise their offer? That’s the big-game theory going on with investors.”
Making a decision
Pebblebrook’s latest offer is a moderate change from its previous ones, Scholes said, and it’s not a “make it or break it” offer like 50% or 100% cash would be. Still, it does sweeten Pebblebrook’s proposal.
The increased cash offer likely played into the LaSalle board’s decision, he said. The proxy advisory services’ recommendations against the Blackstone deal also carry weight, as does feedback from shareholders. Scholes said the investors he’s spoken to support Pebblebrook’s offer.
Many investors favored Pebblebrook’s offer initially, and that number has grown with each improved offer from Pebblebrook, he said.
There are multiple camps among the shareholders, said Wes Golladay, VP and equity research analyst at RBC Capital Markets. The fact that LaSalle stock* is trading above the price indicates support of the Pebblebrook deal, he said, adding the proposed merger raised the company profile and brought new entrants.
LaSalle’s board has likely come to two conclusions, said Michael Bellisario, VP of equity and research senior analyst at Baird. First, Pebblebrook’s offer has a larger cash consideration, and its stock has traded well. The stock value hasn’t been as volatile as the LaSalle board might have thought it would be.
That’s raised doubt that the Blackstone deal will go through, he said.
What will Blackstone do?
Since the LaSalle-Blackstone deal was announced in May, Blackstone has been silent, not commenting on the deal and not revising its bid in response to Pebblebrook’s continued attempts. That’s typical of the company, Scholes said. But in previous mergers and acquisitions, Blackstone hasn’t had this much competition, so there’s no real precedent for the current situation, he said.
Don’t read too much into Blackstone’s silence, Bellisario said. After the announcement of the deal, the ball has always been in Pebblebrook’s and LaSalle’s court. The company’s silence doesn’t mean it intends to walk away with the $112-million elimination fee, he said.
During all of this, Blackstone has been working in the background with LaSalle trying to close the deal, Bellisario said. That behind-the-scenes work includes liquor license transfers, looking at potential operator changes and all of the other legal issues that come with pending real estate acquisitions.
If Blackstone comes back with an offer to counter Pebblebrook’s latest proposal, it would likely remain all-cash but higher, Bellisario said. There’s a $2 spread currently, so the offer would need to be $1.50 or $2 per share higher, which is “a lot to move,” he said. Based on how the agreement played out, it seems Blackstone’s appetite would allow it to increase its offer by 50 cents, 75 cents or even $1 more per share.
“Anything more is kind of a stretch,” Bellisario said.
Even if the deal doesn’t go through with LaSalle, a company like Blackstone has many options, Golladay said. Under the current agreement, if LaSalle were to back out of the deal, it would have to pay Blackstone a $112 million termination fee.
For Blackstone, “that’s not bad,” he said.
Pebblebrook and LaSalle have been meeting in negotiations this week, Bellisario said, and he expects to hear something out of them this week or early next week.
If Blackstone is going to make another offer, it won’t need much time, he said. Blackstone knows what price it is willing to go to if it needs to raise the price, and that would only happen if LaSalle comes out of negotiations and calls Pebblebrook’s offer superior.
The vote scheduled for 6 September won’t happen if Pebblebrook and LaSalle reach an agreement, he said.
If Blackstone then raises its offer, LaSalle’s board will have to determine which offer to approve for a shareholder vote.
“There are a lot of scenarios that could play out,” Bellisario said.
It’s all game theory here, Scholes said. It’s possible LaSalle’s board is negotiating with Pebblebrook to get a better offer out of Blackstone, he said.
At the moment, the odds favor Pebblebrook eventually getting this deal, he said. However, that could change if Blackstone comes back with another offer or there’s a shock to the market. If economic indicators turn negative, nobody would want the deal, he said, because there is increased risk for completing an acquisition late in the cycle.
*Correction, 29 August 2018: The story has been updated to correct the name of a company.