REPORT FROM THE U.S.—Red Lion Hotels Corporation is exploring “strategic alternatives,” including the possible sale of the company, to maximize shareholder value after receiving pressure from some of its largest shareholders in recent weeks.
The hotel owner and franchisor on 28 February received a letter from Columbia Pacific Opportunity Fund, which owns 28.8% of Red Lion’s outstanding stock, “requesting that the board hire an advisor to run a full and transparent process to sell Red Lion in whole or in parts.”
A number of other shareholders also have created noise, voicing their concerns in forums including during the company’s most recent earnings call, said David Loeb, senior research analyst with R.W. Baird & Company.
Red Lion, which has 48 hotels in its network, on Wednesday announced its board of directors had authorized Bank of America Merrill Lynch to explore possibility of a sale, as well as a strategic combination with a third party.
This is not the first time Red Lion has approached the acquisition market. In June 2008, Columbia Pacific Advisors submitted a non-binding proposal to acquire the company at $9.50 per share (a 35% premium to the share at that time). Columbia Pacific ultimately passed on the deal after further due diligence and appears to be on the sidelines this time around as well, according to a research note from Loeb.
Columbia Pacific Opportunity Fund could not be reached for comment by press time Thursday. Red Lion declined to comment.
“A lot of shareholders invested thinking there was an embedded value not reflected in the share,” Loeb said. “ … The board’s responsibility is to represent the shareholders and to look for any opportunities to create value for the shareholders.”
When asked what that “embedded value” might be, Loeb replied, “We’re not sure there is any.”
Red Lion in June 2011 sold the Red Lion Hotel on Fifth Avenue in Seattle for $71 million. Of the company’s existing 25 wholly-owned assets, the only other property that could draw similar value is the 181-room Bellevue hotel in Washington state, which is a prime location and could sell at a premium over the property’s existing cash flow, Loeb said.
“I don’t know if there’s a lot beyond that, and I don’t think the shareholders do either,” Loeb said.
R.W. Baird has a $7 price target for shares of RLH base on a sum-of-the-parts valuation using an 8% capitalization rate on 2013 net operating income, a 10-times multiple on management and franchise earnings before interest, taxes, depreciation and amortization, and allocates $14 million (book value) to marketed properties.
Potential bidders
Loeb said now is a good time to sell, especially with so much private equity waiting for good opportunities. He said the likes of Blackstone, Colony Capital and Apollo Global Management likely will investigate the possibility.
It’s unlikely a major hotel chain with a full spectrum of brand offerings will take a look, he said, but players like Choice Hotels International or Wyndham Hotel Group might be candidates.
The challenge, Loeb said, is that asset-light hotel chains might be turned off by Red Lion’s real-estate holdings. He said a multiparty buyer might emerge, in which a hotel chain buys the brand while an asset investors buys the real estate.
“Given that, I don’t know how this ends,” Loeb said. “I would not expect that it ends in the sale of the company.”