After an initial bid in March and a back-and-forth bidding war with Blackstone Group, Pebblebrook Hotel Trust has emerged as the winner to acquire LaSalle Hotel Properties in a definitive merger agreement valued at US$5.2 billion.
Blackstone, which had four days to counter the most recent Pebblebrook offer, waived the option and will receive a US$112 million breakup fee. LaSalle canceled its special meeting, scheduled for today, relating to the now-terminated Blackstone-LaSalle agreement.
Late last month, Pebblebrook, which already owns a 9.8% stake in LaSalle, made its third offer, which gave investors a 0.92 common share stake and the option of US$37.80 per share in cash for up to 30%, which reportedly pencils out to US$35.09 a share. That bid is the last one standing.
“We are very pleased to have reached an agreement to bring Pebblebrook and LaSalle together in a strategic combination that represents a terrific value-maximizing opportunity for both LaSalle and Pebblebrook shareholders,” said Jon Bortz, chairman, president and CEO of Pebblebrook. “We are confident that shareholders will benefit from this premium portfolio of high-quality independent and branded hotels through its capacity to generate strong cash flow, provide for a stable dividend and capitalize on market opportunities, including improving hotel industry fundamentals. We look forward to moving swiftly to complete this transaction and to welcoming LaSalle employees to our team.”
Bortz was chairman, president and CEO of LaSalle from its founding in 1998 to 2009, when Pebblebrook was formed.
“This agreement with Pebblebrook delivers immediate cash value to LaSalle shareholders. The transaction represents a 48% premium to LaSalle’s unaffected share price,” said Michael Barnello, president and CEO of LaSalle Hotel Properties. “This outcome represents the culmination of a thorough strategic alternatives process, which from the beginning, has been focused on maximizing value for shareholders. On behalf of LaSalle’s Board and management team, I would like to express our deep appreciation to our employees, whose hard work and dedication have been instrumental in making LaSalle the outstanding company it is today. We are committed to working closely with Pebblebrook to quickly bring this transaction to closure.”
R.W. Baird analyst Michael Bellisario wrote on Thursday that he expects investor focus likely to shift to the pro forma company. “In our recent conversations, we believe the most overlooked and misunderstood part of a Pebblebrook-LaSalle merger relates to pro forma leverage and the asset sale assumptions needed in order for the transaction to be completed on (or at the very least analyzed on) a leverage-neutral basis,” Bellisario said. “We model pro forma leverage of 5.4x at closing (excluding preferreds, which add about one turn of leverage, but including ~US$600 million of asset sales), and dispositions are the key driver to achieve a leverage-neutral transaction, which we assume to be 3.3x-3.5x for our model.”
Bellisario continued, “Somewhat paradoxically, a higher Pebblebrook share price may create more interest in Pebblebrook’s stock from REIT-dedicated investors, in our opinion, as post-merger leverage-related concerns could be more easily addressed (either via fewer LaSalle shareholders electing the US$37.80/share cash option or through Pebblebrook eventually issuing equity).
SunTrust Robinson Humphrey analyst C. Patrick Scholes wrote today that the onus now turns to Pebblebrook’s management to execute on the value-creating initiatives it discussed during investor presentations. “Pebblebrook is known as one of the best in breed hotel owners and barring an economic shock or downturn we believe they can get it done,” Scholes said.