Now, it looks like the company has found its ideal partner. After FelCor's negotiations with Ashford Hospitality Trust did not result in a sale, RLJ Lodging Trust and FelCor have entered into a definitive merger agreement under which FelCor will become part of a wholly owned subsidiary of RLJ in an all-stock transaction. The merger, unanimously approved by the boards of both companies, will see the combined company operating under the RLJ Lodging Trust name.
Rather than a cash deal, the merger will be completed through stock conversions. Under the terms of the merger agreement, each share of FelCor common stock will be converted into 0.362 shares of newly issued common shares of RLJ common stock. Following the merger, RLJ’s shareholders are expected to own approximately 71 percent of the combined company’s fully diluted equity, and FelCor’s shareholders are expected to own the remaining 29 percent.
Once the merger is finalized, RLJ is expected to have a pro forma equity market capitalization of approximately $4.2 billion and a total enterprise value of $7 billion, creating the largest pure-play public real estate investment trust dedicated to owning focused-service and compact full-service hotels.
The combined company will have 31,467 rooms across 160 hotels. The merger will be immediately accretive to RLJ’s RevPAR with pro forma 2016 revenue per available room increasing 5.4 percent to $137.
Another Bidding War?
Ashford, under pressure for a year "to explore strategic alternatives" in light of its foundering stock price, submitted a nonbinding proposal to acquire FelCor for $9.27 per share in February, or a premium of 28 percent over FelCor’s stock price at the time. The companies traded open letters about the possible deal, and Ashford ultimately revised its bid to include a $213-million cash component with the remaining consideration consisting of 0.93 shares of Ashford Trust, 0.003 shares of Ashford Inc., and 0.001 warrants to purchase Ashford Inc. shares in exchange for each share of FelCor. Based on April 21 closing prices, the revised proposal equates to $7.63/share (4.3 percent premium for FCH's shareholders).
In a statement, investment company Robert W. Baird & Co. said that while Ashford could increase its bid for FelCor (echoing last year's bidding war for Starwood), "all else equal, we believe FelCor’s board prefers the combination with RLJ given that the pro forma company will have lower leverage than under a merger with Ashford Trust and will be internally advised, which we believe FelCor’s Board values highly given comments in previously filed proxy statements.
"Ashford Trust continues to own 4.5 percent of FelCor, and we believe the merger’s implied 16.7 percent premium to FelCor’s current share price is an attractive near-term consolation prize for Ashford Trust."
Benefits of Scale
The new RLJ will become the third biggest pure-play lodging REIT by enterprise value. In a statement, the company said that the size would create “meaningful scale to capitalize on cost efficiencies, negotiate leverage and access to capital, and the opportunity to strategically recycle assets and optimize the portfolio.“
RLJ will now have ownership interests in 160 hotels, including premium-branded hotels located primarily in urban and coastal markets. The combination also provides significant penetration within key high-growth markets and broad geographic and brand diversity.
“We are truly excited about this unique opportunity as we transform our two companies into one of the largest pure-play lodging REITs,“ Ross H. Bierkan, RLJ’s president and CEO, said in a statement. “Combining these two complementary portfolios creates a best-in-class platform that is well positioned to deliver long-term growth and generate significant shareholder value.
“In addition to being immediately accretive to our RevPAR, merging with FelCor expands our geographic footprint in highly desirable markets on the West Coast, while strengthening our presence in other coastal markets in the East and the South. RLJ’s enhanced scale post-merger is expected to generate both corporate- and property-level operating cost benefits and market leverage opportunities, which will drive shareholder value over time.”
Steven R. Goldman, FelCor’s CEO, said that the merger would position the combined companies for significant long term growth. “This merger creates a company that has greater reach in key markets with a streamlined operating structure and more advantageous cost of capital,“ he said. “FelCor shareholders are receiving an attractive valuation for the company’s hotel assets and have the opportunity to benefit from a highly respected management team with a history of value creation.”
The merger of RLJ and FelCor is expected to save approximately $22 million from the elimination of duplicative corporate general and administrative costs. The combined company is also expected to benefit from long-term property-level savings in the areas of energy/utility contracts, insurance and furniture, and fixture and equipment procurement.
The combined entity will have approximately $700 million of available liquidity, which includes approximately $400 million of an undrawn credit facility. The combined entity’s projected pro forma net debt to EBITDA ratio during the first full year of operations is expected to be less than 4.5x (or less than 5x including convertible perpetual preferred equity) and is expected to improve each year thereafter.
RLJ will continue to be led by Robert L. Johnson as executive chairman, Ross H. Bierkan as president and CEO and Leslie D. Hale as COO and CFO. Upon completion, the company’s headquarters will remain in Bethesda, Md. The number of trustees on RLJ’s board will be increased to eight, with one existing FelCor director mutually acceptable to FelCor and RLJ being appointed to the RLJ board upon closing.