After six months of “will-they-or-won’t-they” drama from lodging real estate lodging trusts LaSalle Hotel Properties, the Blackstone Group and Pebblebrook Hotel Trust, we have an answer: LaSalle has terminated its planned merger agreement with Blackstone. Instead, Pebblebrook will acquire 100 percent of LaSalle’s outstanding common shares in a deal valued at approximately $5.2 billion.
“In the history of the hotel ownership world, [this merger] probably makes the most sense," said Raymond Martz, EVP and CFO for Pebblebrook Hotel Trust, noting that the two companies share a similar investment strategy in terms of the types of properties that they acquire and invest in, as well as focusing on similar markets and using similar operators. “We talked with [our board] extensively and we thought that the time is right, because it made sense in all those areas.”
Offers and Counteroffers
The war over LaSalle began in March, when Pebblebrook proposed a merger for about $30 per LaSalle common share and gave LaSalle a valuation of more than $3 billion. The offer was rejected, as were two more that followed. The two companies already have a connection: Pebblebrook CEO Jon Bortz served as president and CEO of LaSalle Hotel Properties from its inception in April 1998 until he left the company in September 2009. Upon Bortz's departure, Michael Barnello, who had been COO and EVP of acquisitions, was named CEO. A year later, Bortz formed Pebblebrook and became chairman of the board, president and CEO.
About half of the assets that LaSalle owns were acquired when Bortz was CEO, said Michael Bellisario, senior research analyst for hotel REITs & C-corps at R.W. Baird. “And another three quarters of the remaining assets [that] Pebblebrook references, they either looked at, underwrote or bid on when LaSalle acquired them.”
In May, LaSalle approved a bid from Blackstone in an all-cash deal valued at $4.8 billion, or $33.50 per share. At the time, this seemed to end Pebblebrook’s overtures for the company, but Pebblebrook upped the ante several weeks later with a new bid, offering an initial price of $37.80 per LaSalle common share—a premium of 13 percent over Blackstone’s bid. Pebblebrook’s new offer took into account the $112-million cost of the termination fee LaSalle agreed to pay to Blackstone if the deal fell through.
“We were getting a significant number of inbound calls from LaSalle shareholders, believe it or not, telling us they really want us to be successful and acquire the company and they're really supportive of us, which was very encouraging,” Martz said. Importantly, the bid announcements were boosting Pebblebrook's stock. “Usually, when companies try to acquire other companies, the acquirer’s stock usually trades down,” he said. “Ours actually traded up, and in subsequent offers our stock also traded up, which is very unusual. But it really speaks to the support, again, that the investment community had for combining these portfolios with all the additional benefits that come from it, which allowed us [to] continue to pursue this merger.”
On Aug. 21, Pebblebrook released a new offer letter to LaSalle’s board of trustees, submitting an “enhanced merger proposal” for a strategic combination that would block the proposed merger with Blackstone Group subsidiary Blackstone Real Estate Partners.
“Under our enhanced offer, LaSalle shareholders will receive consideration of substantially greater value at closing than under the Blackstone proposal and will also have the option to participate in the value creation of the combined company going forward,” the updated offer letter said. Under the increased terms, the maximum amount of LaSalle shares eligible to receive cash increased from 20 percent to 30 percent of the outstanding shares, representing a 50-percent increase in the number of shares that may receive cash compared to Pebblebrook’s previous offer while keeping the price fixed at $37.80.
Amid the offers and counteroffers, Martz said that the Pebblebrook team tried not to get emotionally involved in the deal, but rather to treat it like any other transaction, with a limit to how far they could go. “We have [what we call] our point of indifference,” he said. “We have our line, and we'll go up to that line. We're not going to go past it, and we won't feel bad if we lose it. That's above the price we think it's worth. And that's the same approach we had with the LaSalle portfolio. We knew what our breaking point was where we wouldn't go any further. Fortunately, we never went past that.”
With the vote on Blackstone’s offer slated for Sept. 6, LaSalle’s board of trustees decided on at 2:30 a.m. on Sept. 5 that Pebblebrook’s offer constituted a "superior proposal" as defined in the Blackstone merger agreement. The transaction was then approved unanimously by both boards. The transaction, which is subject to customary closing conditions, including regulatory approvals and approval by LaSalle shareholders and Pebblebrook shareholders, is expected to close in the fourth quarter of 2018.
“Pebblebrook always saw an opportunity to combine these companies,” said Bellisario. “The reason for them being persistent and sticking with it is because they could be. They had a strategic advantage over pretty much everyone given the fit of the two portfolios, their cost of capital advantage versus other REITs.”
Compared to Blackstone or other private equity buyers, what benefited Pebblebrook was that stock prices for the whole hotel REIT market moved much higher from March to the May-June timeframe. “There's a different analysis when you have to do a cash versus stock deal,” Bellisario said.
The unified REIT portfolio will have 66 independent and collection-branded hotels and resorts located in or near key urban markets in the U.S., with a greater presence in higher-growth U.S. markets. According to Pebblebrook, it is also poised to be the largest owner of unique independent, small brand and collection hotels; the third-largest company in the lodging REIT sector as measured by enterprise value; and the second-largest by equity market capitalization.
The size of the combined REIT will give it greater negotiating ability with the brands, management companies, OTAs, banks and capital providers, Martz said.
“At the end of the day, LaSalle maximizes value for shareholders,” Bellisario said. “You, an investor, might not have liked the whole process on how it played out, and I guess it cost them $112 million in a termination fee, but the rest is history now. They need to be friends and combine their companies.”
Upon the deal’s closing, Bortz will continue to serve as Pebblebrook’s chairman, president and CEO; Martz will continue to serve as EVP, CFO, treasurer and secretary; and Thomas Fisher will continue to serve as EVP and CIO. The Pebblebrook board will remain unchanged.
Raymond James and BofA Merrill Lynch are acting as financial advisors to Pebblebrook, and Hunton Andrews Kurth is acting as legal counsel. Citigroup Global Markets Inc. and Goldman Sachs & Co. are acting as financial advisors to LaSalle, and Goodwin Procter and DLA Piper are acting as legal counsel.