Editor’s note: This story was updated to include comments from Michael Bellisario, VP and equity research senior analyst at Baird.
BETHESDA, Maryland—LaSalle Hotel Properties officials expect to sell to Blackstone in the coming months, but Pebblebrook Hotel Trust officials haven’t given up in their pursuit of the company.
LaSalle officials announced Monday morning they’ve reached a $4.8-billion agreement with Blackstone to “acquire all outstanding common shares of beneficial interest of LaSalle,” according to a news release.
That deal, which is officially with Blackstone Real Estate Partners VII, will be in all cash and comes in at $33.50 a share. Closing is expected in the third quarter of 2018 pending approval of the real estate investment trust’s shareholders.
Pebblebrook officials had been publicly pursuing LaSalle for months and had most recently issued an offer of $32.49 a share, up to 20% of which could have been paid out in cash. Following the announcement of the Blackstone deal, Pebblebrook officials announced a proposal of $36.49 per share (based on Pebblebrook’s share price as of press time), still with 20% cash.
In the news release announcing the Blackstone deal, LaSalle Chairman Stuart Scott referred to the pending acquisition as “the culmination of a thorough review of strategic alternatives.”
“As part of the board’s review, the company and its advisers contacted 20 potential buyers, including strategic parties, brands and private equity firms,” Scott said in the release. “As a result, 10 potential buyers executed confidentiality agreements and received non-public information, and the board engaged in extensive negotiations over price and terms. After careful consideration of multiple proposals received, the board determined that this transaction represents the most compelling opportunity for LaSalle’s shareholders, delivering a significant premium with immediate and certain cash value.”
LaSalle officials declined a request for an interview.
Based on the news release, LaSalle officials are confident the math of the deal works out in their favor. In addition to the price exceeding Pebblebrook’s offer, the $33.50 per share is roughly 35% over the closing price on 27 March (the day before Pebblebrook’s public pursuit of LaSalle began) and is 13% over the company’s consensus net asset value.
The LaSalle portfolio includes 41 properties with more than 10,000 rooms in urban and resort markets. In the news release announcing the deal, Tyler Henritze, head of U.S. real estate acquisitions for Blackstone, noted that his company is “thrilled to acquire LaSalle and have the opportunity to invest in its high-quality urban hotel portfolio.”
LaSalle has more independent properties than most hotel REITs do, which was one reason a potential Pebblebrook-LaSalle merger seemed to make sense to Pebblebrook officials and industry analysts. The companies also have a shared history, with Pebblebrook President and CEO Jon Bortz previously working in the same capacity at LaSalle.
In a statement issued following LaSalle’s announcement, Bortz said his company’s offer for LaSalle is “substantially superior” to Blackstone’s.
“We continue to believe that our offer maximizes immediate and long-term value for LaSalle’s shareholders,” he said. “The combination of Pebblebrook and LaSalle would create a hotel industry leader, particularly in the independent and lifestyle segment, and it would allow shareholders of both companies to benefit from Pebblebrook’s management of the combined portfolio and the synergies that would result from bringing these two highly similar companies together. We are disappointed that LaSalle’s board of trustees has chosen not to pursue the unique opportunity that we presented.”
Patrick Scholes, managing director of lodging, leisure and gaming equity research for SunTrust Robinson Humphrey, said as the deals currently stand he agrees that Pebblebrook’s offer is the better of the two. But he also believes that Blackstone has the ability—and probably the desire—to come back with a higher offer.
“Initially I didn’t believe Pebblebrook would up their offer and there’d be a bidding war, but I suspect Blackstone has probably not made its best and final offer at this point,” he said.
He noted the all-cash structure of the Blackstone deal is a benefit for that company, but the higher overall value and large amount of crossover between Pebblebrook and LaSalle shareholders is enough to “tip the scales” in Pebblebrook’s favor.
If Blackstone ultimately ends up buying the LaSalle portfolio, Scholes said he expects the company to make some renovations and other improvements at the hotels, then sell them off at a profit.
In a note to investors, Michael Bellisario, VP and equity research senior analyst at Baird, said he believes the emergence of another bidder from the private equity space is unlikely. He also noted that “LaSalle has been clear throughout the process that it favored cash over stock consideration.”
If the Blackstone-LaSalle deal is terminated by LaSalle officials, LaSalle would be on the hook for a $112 million fee. Blackstone would face a termination fee of $336 million.
Bellisario said the updated Pebblebrook offer wasn’t new to LaSalle’s board at the time of the announcement and seems to have been fully considered.
“It was something they had negotiated,” he said. “They further increased their third proposal and (LaSalle’s board) had it in hand.”
He said ultimately the deal comes down to the perceived value of cash versus stock and Blackstone’s ability to obtain relatively low-cost debt to fund an all-cash transaction.
He noted there are still things that can change the outlook on the deal before closing, particularly the possibility of Pebblebrook’s stock increasing substantially before a shareholder vote making that deal considerably more attractive, but now it is clearly Blackstone’s deal. And it is a deal that makes a lot of sense from that company’s perspective in large part because LaSalle has a portfolio of “unique assets that don’t trade often.”
“There are not a lot of portfolios in the public space like that, and you had a motivated seller,” Bellisario said. “The stars kind of aligned here. Blackstone will probably put leverage (on the assets), but they can get better debt than anyone else.”
If the Blackstone deal is culminated, it would mark the second time in just over a year a hotel REIT was pursued by one of its competitors before ultimately being bought by a third party.
Ashford Hospitality Trust publicly pursued FelCor Lodging Trust in early 2017 in a series of publicly released letters before FelCor officials ultimately opted to take a deal with RLJ Lodging Trust, which closed in September 2017.