The Pebblebrook-LaSalle-Blackstone saga keeps on spinning. It’s just over two weeks before LaSalle Hotel Properties’ board of trustees votes on a possible acquisition by Blackstone Real Estate Partners, but Pebblebrook Hotel Trust is still trying to shake things up.
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 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 new offer letter declares.
New Offer, New Terms
Under the increased terms, the maximum amount of LaSalle shares eligible to receive cash is 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 prior offer. The revised proposal maintains the 0.92 exchange ratio but increases the cash component from 20 percent to 30 percent (price still fixed at $37.80/share). Assuming 30 percent of LaSalle shareholders elect to receive cash in lieu of stock, the revised offer implies $36.57/share, which is a slight increase from $36.39/share implied by the previous offer (both based on Pebblebrook's August 21 closing price).
“The terms of our enhanced offer are clearly superior to the Blackstone proposal, as was our prior offer,” said Jon E. Bortz, chairman, president and CEO of Pebblebrook Hotel Trust in a statement, claiming that the new offer provides enhanced certainty to LaSalle’s shareholders through the increased fixed-cash portion. “We’ve recently entered into an agreement to sell certain LaSalle properties in connection with the closing of a Pebblebrook-LaSalle merger. These strategic sales will allow us to continue to focus on properties and markets that are core to our go-forward strategy and also enable us to materially increase the cash component of our offer—and the overall value of our offer—without increasing our leverage compared to our prior proposal. For those who receive Pebblebrook shares, our offer continues to provide significant long-term financial and strategic upside opportunity, as well as increased dividend income, neither of which can be matched by the Blackstone take-under. The proceeds from the asset sales will effectively be delivered back to LaSalle shareholders as a benefit through the increased 30 percent cash component of our proposal. This proposal is not contingent on those property sales, and Pebblebrook is prepared to move forward immediately upon acceptance of our proposal by LaSalle’s Board. We strongly encourage LaSalle’s Board to engage in discussions with us to execute a merger agreement and seize this unique opportunity to combine our two companies to create the industry leader thatshareholders so strongly desire.”
Pebblebrook said that the latest proposal would remain outstanding “following a rejection” by LaSalle shareholders of the proposed transaction between LaSalle and Blackstone, which is scheduled to be voted on by LaSalle shareholders on Sept. 6—a strong sign of the company’s confidence in an acceptance.
Blackstone or Pebblebrook?
In a statement, financial services firm Baird Equity Research suggested the timing of Pebblebrook's revised offer was “somewhat surprising given management’s continued high level of confidence that the LaSalle-Blackstone merger will be voted down at the September 6 special meeting.” Pebblebrook noted that it has entered into an agreement to sell several of LaSalle's non-core properties—which Baird assumes to be assets based in New York City—contingent on a Pebblebrook-LaSalle merger being consummated.
“The increased cash consideration of [approximately] $420 million is effectively being funded by the disposition proceeds (which are likely to total more than the increased cash consideration, in our opinion), which results in no change to the leverage profile of the pro forma company relative to the prior proposal,” Baird claimed. “However, asset sales would have occurred under the prior proposal, too, in our opinion.”
Baird expects LaSalle's board to consider and respond to the new offer, especially given that LaSalle's board responded to the reiteration of Pebblebrook's previous, unchanged offer presented on July 20. The Sept. 6 vote requires a two-thirds majority to pass, but Baird does not think that LaSalle has the necessary support to make the Blackstone deal go through, particularly following the revised offer and the increased percentage of cash consideration. If the merger is not approved, the all-cash agreement with Blackstone at $33.50/share will be terminated, and LaSalle is expected to conduct another review of all the company's strategic opportunities, which include continuing to operate as a going concern.
On May 21, LaSalle entered into a definitive agreement with Blackstone affiliates that would see Blackstone acquire all outstanding common shares of beneficial interest of LaSalle for $33.50/share in an all-cash transaction valued at $4.8 billion (the “Blackstone Merger Agreement”).
In accordance with the terms of the Blackstone Merger Agreement, and in consultation with its financial and legal advisors, the LaSalle board will now review the new proposal. In a statement, the company said the board has not changed its recommendation of the existing transaction with Blackstone or made any determination as to whether Pebblebrook’s proposal constitutes, or could reasonably be expected to lead to, a “Superior Proposal” under the terms of the Blackstone Merger Agreement. “The board expects to respond to Pebblebrook’s proposal in due course," it stated.
LaSalle has advised its shareholders to take no action at this time.