Shareholder opposition to ESA sale grows

George Sell George Sell Uploaded 24 March 2021

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US: Several major shareholders in Extended Stay America have expressed their opposition to the proposed sale of the company to a Starwood Capital/Blackstone JV.

Tarsadia Capital, which owns a 3.9 per cent stake in Extended Stay America, plans to vote against the proposed $6 billion, $19.50-per-share, sale.

The company sent a letter to fellow ESA shareholders, which said: “ESA has been a big disappointment to public market investors since its IPO. In its seven years as a public Company, it has cycled through executive teams, operational strategies, and strategic reviews, all while significantly underperforming peers. We do not believe the Company's underperformance was inevitable or that it must persist. ESA owns some of the best hospitality assets in the country and should generate excellent shareholder returns from those assets.”

“We are gravely disappointed to see the Board agreed to sell the Company for a grossly inadequate price. We have every confidence that ESA, with the right leadership and Board, can generate much better value for shareholders than the $19.50 per share the Board accepted after its seemingly hasty negotiations with Blackstone Real Estate Partners and Starwood Capital Group. The $6 billion transaction involving more than 560 properties appears to have come together in less than five weeks, right as the economy begins a recovery. The timing and pricing of this transaction are wrong. This deal is not in the best interests of ESA's public shareholders. We, therefore, oppose the deal,” the letter continued.

Justin Akin, a portfolio manager at River Road, which owns a 3.2 per cent stake in ESA, said: “It’s at a discount to any kind of historical M&A transaction in the space. Clearly, they did well during the Covid downturn in terms of occupancy and significantly outperforming peers. We’re not against a takeout. We want to see a fair value for it, and we think $19.50 is not that.”

Michael Cook, CEO of SouthernSun, which owned a 1.9 per cent stake in ESA at the end of December, said: “The deal undervalues Extended Stay’s business, is at odds with management’s own assessments, occurs at a profoundly inopportune time relative to the market recovery, and was the product of a flawed and truncated diligence process.”

William Weber, a partner and portfolio manager at Cooke & Bieler, which owned a 1.8 per cent stake in Extended Stay at the end of December, said: “The offer does fundamentally undervalue the business. Covid was clearly a detour for the business but we were very excited about the prospects of finally Extended Stay returning to a net unit growth on a system-wide basis.”

Hawk Ridge Capital Management, which has about a two per cent stake in ESA, also plans to vote against the deal.

Bruce Haase, Extended Stay America’s CEO, said in a statement that the all-cash offer from Blackstone and Starwood “provides a compelling and certain return for our shareholders” and urged the approval of the sale.

“Management’s recommendation, and the board’s decision, to approve this transaction, reflected careful consideration of the value achievable under the company’s business plan, the execution and market risks inherent in the plan, and the capital needed to execute the plan,” Haase said. “We look forward to discussing the rationale for this transaction with our investors.”

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