Less than a month ago, it looked like Blackstone Real Estate Partners' bid to buy real estate investment trust LaSalle Hotel Properties in an all-cash deal valued at $4.8 billion, or $33.50 per share, had put an end to Pebblebrook Hotel Trust's plan to acquire the REIT.
But a lot can change in just a few weeks, and Pebblebrook is still in the game and ready to fight for LaSalle, a lodging REIT that owns 41 upper-upscale and luxury hotels with approximately 10,450 rooms in major coastal markets.
Today, Pebblebrook released an offer letter to LaSalle's board of trustees, submitting a revised merger proposal for a strategic combination with LaSalle. This offer was unanimously approved by Pebblebrook's board of trustees.
The offer for 100 percent of LaSalle’s outstanding common shares represents an implied price of $37.80 per LaSalle common share based on a fixed exchange ratio of 0.92 Pebblebrook common share for each LaSalle common share and Pebblebrook’s five-day volume weighted average price as of June 8, 2018.
Significantly, the offer provides a premium of 13 percent over the $33.50-per-share price in LaSalle’s agreement with Blackstone. Pebblebrook’s offer takes into account the $112-million cost of the termination fee LaSalle has agreed to pay to Blackstone if the deal falls through.
“The board of Pebblebrook remains convinced that a strategic combination with LaSalle represents a value-maximizing opportunity for the shareholders of both LaSalle and Pebblebrook,” Jon E. Bortz, chairman, president and CEO of Pebblebrook Hotel Trust, said in a statement. “The performance of both LaSalle’s and Pebblebrook’s shares since LaSalle’s May 21st announcement of its sale agreement with Blackstone at $33.50 per share is evidence that the investment community and both LaSalle’s and Pebblebrook’s shareholders wholeheartedly agree with us. In fact, we are not aware of any listed equity REIT M&A transactions since 2006 in which a target has agreed to a cash offer at a discount of greater than 1 percent compared to a competing share or share/cash offer.”
Pebblebrook’s offer provides LaSalle’s common shareholders with the option for each share to elect to receive $37.80 per share in cash instead of Pebblebrook shares, subject to a cap of 20 percent of LaSalle shares receiving cash and customary proration if the number of LaSalle holders electing to receive cash instead of stock is oversubscribed. The per-share cash amount is fixed at $37.80 and was calculated by multiplying the fixed exchange ratio of 0.92 and Pebblebrook’s five-day VWAP of $41.09 as of June 8, 2018.
“Our offer is without a doubt a superior proposal to the sale agreement LaSalle executed with Blackstone,” Bortz said. “It provides both immediate and long-term value for LaSalle shareholders who will be able to benefit from the improving industry fundamentals in this already strong travel environment. In addition, the stock consideration offers LaSalle’s shareholders a more attractive opportunity from a tax perspective, and for those shareholders who want cash, the market has demonstrated that there is substantial liquidity at prices significantly above the Blackstone offer. We are encouraged by the overwhelmingly positive reaction from shareholders of both companies who recognize the upside potential of owning shares in a combined entity that will benefit from the growth and the meaningful operational and investment synergies that would result from bringing these two highly similar companies together.”
In accordance with the terms of the Blackstone merger agreement, and in consultation with its financial and legal advisors, the LaSalle board will review Pebblebrook’s proposal to determine the course of action that it believes is in the best interest of the company’s shareholders. In a statement, the board said that it has not made any determination as to whether Pebblebrook’s offer 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.”
What This Means
A note from RW Baird opined that Pebblebrook's public reiteration of its interest in merging with LaSalle was largely expected, given that LaSalle's shares are trading approximately 5 percent above Blackstone's $33.50-per-share offer.
While the key terms are unchanged from Pebblebrook's previous offer, the proposal is effectively 3 percent higher as it now contemplates the $112 million termination fee payable to Blackstone (approximately $1 per LHO share).
“We believe LaSalle's board will now need to more seriously consider Pebblebrook's offer given the meaningful increase in Pebblebrook's stock price (and implied consideration for LaSalle) since the 0.92 fixed exchange ratio offer was last presented,” the Baird note continued, adding that more clarity surrounding the cash component is a positive: “Pebblebrook's offer continues to include an option for LaSalle’s shareholders to receive up to 20 percent of the consideration in cash, which would be funded partially with LaSalle's existing cash on hand. Pebblebrook's revised offer notes that the 20-percent cash component is fixed (effectively a collar) and based on the $37.80/share implied offer price; therefore, the cash component percentage could increase if Pebblebrook's stock price declines.”
Pebblebrook's offer considers a five-day VWAP when calculating the value of the merger proposal. “One hang-up we potentially see is that LaSalle's board previously evaluated the merits of prior offers using 30-day and 60-day VWAPs, which is what we believe LaSalle's board is more than likely to use when evaluating Pebblebrook's offer,” according to Baird. As such, Pebblebrook's stock consideration is not as valuable from LaSalle's perspective, in Baird's opinion.
LaSalle’s board will evaluate Pebblebrook’s updated offer and must determine if it constitutes a “superior proposal” as defined in the existing merger agreement with Blackstone.
If it does consider the Pebblebrook bid to be superior to Blackstone's, LaSalle’ board will notify Blackstone of its intention to terminate the merger agreement. Blackstone would then have four business days to renegotiate a revised merger proposal, setting the stage for another round of offers and counteroffers.
LaSalle advised its shareholders to take no action at this time while the offer is under consideration.