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Blackstone, Starwood Capital acquire ESA

Blackstone Group and Starwood Capital Group must like the outlook for the extended-stay market as business travel begins to pick up. On Monday, the two PE giants announced they were teaming up to acquire Extended Stay America Inc. (ESA) for US$6 billion, yet another sign that there is growing confidence in the future of the lodging business.

ESA and its paired-share REIT, ESH Hospitality, Inc. will be acquired by the 50/50 joint venture for US$19.50 per paired share in an all-cash transaction. The price represents a premium of 23.3% over the 30-day volume-weighted average share price ending March 12, 2021, and a premium of 15.1% over the closing stock price on March 12, 2021.

Michael Bellisario, analyst with R.W. Baird, wrote on Tuesday that based on its estimates, the take-private price implies approximately US$93,000/key (owned rooms only), 11.4x 2022E EBITDA, and 10.6x 2023E EBITDA. Based on pro forma 2019 metrics, it calculates a 10.7x EBITDA multiple and an 8.3% NOI cap rate.

The new partners, often rivals, will own 567 properties owned and operated properties by ESA, which also franchises another 82 properties. In February of this year, ESA launched an upgraded brand tier with better amenities — Extended Stay America Premier Suites — as a franchise conversion play with an initial footprint of some 30 assets expected. 

Starwood already owned a 10% stake in ESA, which far outperformed the struggling market in 2020, while Blackstone until June owned a 4.9% stake. Previously, in 2004, Blackstone acquired Extended Stay America for US$3.1 billion and by 2007 sold it to The Lightstone Group for US$8 billion. In June 2009, affiliates of Blackstone and Starwood took the company out of bankruptcy, and in July 2010, a consortium led by Centerbridge Partners, Blackstone Group and Paulson & Co. bought the hotel company for nearly US$4 billion.

A recently opened Extended Stay America in Oklahoma
A recently opened Extended Stay America in Oklahoma

“Travel and leisure is one of Blackstone’s highest conviction investment themes, and we have confidence in the extended-stay model,” said Tyler Henritze, head of U.S. acquisitions for Blackstone Real Estate. “We helped create this company nearly 20 years ago, and believe our expertise puts us in a unique position to add long-term value.”

Henritze told the Wall Street Journal that it made sense to team up with Starwood Capital. “It gives us more [cash] to continue to look at other hospitality opportunities which could present themselves coming out of COVID,” he said.

Barry Sternlicht, CEO of Starwood Capital, added, “Extended Stay has demonstrated resilience over the past year despite persistent challenges due to government lockdowns and travel restrictions. We are excited about the company’s growth opportunity as restrictions ease and we’re confident that, in partnership with Blackstone and the company, our team has the right experience to drive continued success.”

The transaction has been unanimously approved by ESA’s Board of Directors and has also been approved by ESH’s Board of Directors. The deal is expected to close in the second quarter of this year.

ESA does not expect to pay its regular quarterly distribution during the pendency of the transaction except for the previously declared US$0.09 distribution on March 26, 2021. However, under the terms of the merger agreement, the acquiror may request that ESA pay a special distribution immediately prior to the closing of up to US$1.75 per paired share, in which case the cash consideration paid in the merger will be reduced by the amount of the distribution.

Goldman Sachs & Co. is serving as financial advisor to the ESA and Fried, Frank, Harris, Shriver & Jacobson is acting as legal counsel.

J.P. Morgan and Citigroup Global Markets are acting as financial advisors and providing debt financing to Blackstone and Starwood. Simpson Thacher & Bartlett is acting as legal advisor to Blackstone, and Kirkland & Ellis is acting as legal advisor to Starwood Capital.

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