It has been a strange few months for shareholders of Ashford Hospitality Prime (NYSE:AHP). The upscale hotel REIT’s veteran management team was being challenged by a hedge fund with no history of activism. It has thrown shareholders for a loop, although a federal judge just enjoined the proxy fight from continuing.
By way of disclosure, I am a longtime shareholder of both AHP and Ashford Hospitality Trust, having followed the company since its IPO. I have been acquainted with their CEO, Monty Bennett, since college. I am a 0.01% shareholder in both companies.
The story offers an important cautionary tale for all hotel companies and investors. Dealing with an intransigent hedge fund, especially one that refuses to communicate with existing management, can create enormous headaches.
The Ashford Prime story offers smart lessons for management and shareholders in beating back activist funds. As this story demonstrates, an opponent’s weaknesses are often found in plain sight.
The saga began last autumn. SEC filings show Sessa Capital owned roughly a million shares of Ashford Prime stock as of June 30, 2015. Then in August, when Ashford Prime management announced its intention to sell the company, Sessa Capital doubled its position by the end of September.
It took but three months after the Ashford Prime sale announcement that Sessa Capital demanded that Ashford Prime management expedite the sale process.
This was the first hint of something odd in regards to Sessa Capital. Hotel REIT sales often take at least a year, if not longer. Why did Sessa Capital want a deal consummated so quickly? Ashford Prime management had combined hospitality experience of 140 years, and several of its employees had also been with its parent company, Ashford Hospitality Trust, and steered it brilliantly through the financial crisis.
Why not let the process mature?
Perhaps Sessa Capital had some grand plan for changing how the company operated? It never discussed any such plan, either in press releases or investor presentations. When I challenged the nominees in various articles to articulate a plan, they never responded.
Those two questions alone tipped me to Sessa Capital’s true intent. The only logical conclusion was Sessa Capital wanted a quick flip of its investment. When it became apparent that the management-led sale would not occur due to market changes, Sessa Capital began its proxy fight. That was the third tip-off. If experienced management couldn’t make a deal, why would Sessa Capital be able to?
Supporting the notion that Sessa Capital merely wanted a quick sale was the slate of directors it offered, none of whom had any material hospitality experience. A read of the nominee list suggested that Sessa Capital was not experienced in proxy fights, and clearly had no viable plan for actually operating the company if it won.
The “quick flip” theory gained more traction when Ashford Prime management filed a lawsuit seeking to enjoin the proxy contest – a lawsuit that Ashford won this past Monday.
In the court order, Judge David Godbey found that Sessa claimed they had no plans for Ashford Prime if it got control of the board. However, correspondence revealed Sessa’s intent to sell the company, and that by failing to indicate this as a possibility in the nomination process, it failed to meet SEC regulations regarding proxy contests.
Thus, my thesis regarding Sessa Capital proved to be correct. Not only that, the tactics used by Sessa – which included a refusal to even meet with Ashford management to settle the fight – showed that this activist fund had only one plan.
That’s the big lesson for shareholders and hotel owners. There was never any offer by the opponent to work something out. When that happens, owners need to strap in for a tough fight and not roll over. Here are the steps to follow when there are no negotiations to be had (most of which Ashford management engaged in):
- Form a hypothesis as to what’s really going on with your opponent.
- Employ tactics to frustrate their goal, including litigation.
- Research your opponent so you understand their weaknesses, and how to communicate those weaknesses to shareholders.
- Offer to communicate with all shareholders, big and small, such as in an online town hall meeting. Average Joe investors will be more likely to take your side if you have a chance to communicate to them directly.
- Consider making some of the reforms asked for. That removes ammunition from the opponent.
Contributed by Lawrence Meyers, PDL Capital, Inc., Woodland Hills, California