Ashford Hospitality Trust announced Tuesday that it has submitted a non-binding proposal to acquire FelCor Lodging Trust in an all-stock transaction for US$9.27 per share, representing a 28% premium over FelCor’s stock price of US$7.23 on February 17, a 23% premium to the 10-trading day volume weighted average price, and an 11% premium to FelCor’s 52-week high closing stock price of US$8.34 on December 14, 2016. The combined company would be the second-largest pure-play publicly traded lodging REIT by room count and the third largest by enterprise value.
FelCor shareholders would receive a fixed exchange ratio of 1.192 shares of Ashford Trust, a total of 400,000 shares of Ashford Inc., and 100,000 warrants to purchase Ashford Inc. shares.
“Overall, while we believe a merger, if consummated, could be a meaningful value creation event for Ashford Trust, we ascribe a low probability to a merger being completed given that Trust’s discussions with FelCor appear to have stalled since they were first initiated in October andFelCor’s recent appointment of Steve Goldman as CEO complicates the matter (his appointment is effective as of March 1),” R.W. Baird analyst Michael Bellisario said in a Tuesday morning note.
Patrick Scholes, analyst with SunTrust Robinson Humphrey, added that Goldman’s hire typically implies that company intends to continue as an ongoing entity. “We speculate that perhaps this hire was made as a defensive measure against such an unsolicited buyout offer,” Scholes said, adding, “Ashford could be in for a fight and we would not be surprised to see the offer go up if Ashford is serious about this acquisition. We suspect activist investors will also push for a FCH sale.”
To further its agenda, Ashford also announced on Tuesday it was nominating a slate of seven independent directors to FelCor’s board, including several with meaningful real estate experience. “We expect Trust to begin dialoguing with FelCor’s investors prior to FelCor’s annual meeting,” Bellisario said. “However, we would note that FelCor’s Board composition has changed recently with a few legacy board members not standing for upcoming re-election.”
Ashford Trust, which currently owns 4.5% of the outstanding common shares in FelCor, said in a statement on Tuesday that is has attempted to conduct good faith discussions with FelCor since early October 2016. It added, that even with a fully executed non-disclosure agreement in place, FelCor has failed to meaningfully engage and has refused to provide customary information for due diligence and to fully evaluate this significant opportunity to unlock value for shareholders of both companies. As a result, Ashford Trust, in consultation with its financial and legal advisors, has now decided to make the proposal public in order to inform FelCor’s shareholders of its intent.
“The benefits of this proposal are compelling.We believe the combination would provide significant strategic and financial benefits to both sets of shareholders and create a clear path towards considerable long-term value creation far in excess of FelCor’s standalone prospects,” said Benjamin Ansell, lead director of Ashford Trust. “While it remains our strong desire to reach an agreement with FelCor on a friendly basis, we are fully committed to pursuing this transaction and are prepared to take all necessary steps to complete it, including nominating a slate of independent directors to ensure that FelCor appropriately considers our proposal.”
FelCor Lodging Trust confirmed Tuesday that it received an unsolicited, non-binding and conditional proposal, adding that it established a transaction committee in December of 2016, comprised of independent directors, to facilitate consideration of Ashford’s proposal. To date, however, FelCor said the parties have not been able to reach mutually agreeable terms.
FelCor said on Tuesday that its shareholders have been advised to take no action and cautioned that there can be no assurance that any transaction will be reached or the terms on which any such agreement would be based.
In a letter to FelCor’s board of directors, Ashford Trust detailed the potential strategic and financial benefits of the proposed combination, including:
- Significant value creation potential for both sets of shareholders;
- Operational and G&A efficiencies;
- Creation of the third largest pure-play lodging REIT by enterprise value with a larger and more diversified portfolio of 159 properties and 36,657 keys, limiting exposure to market specific volatility;
- Enhanced scale of combined platform should enable a larger equity float and trading volume that could lead to multiple expansion with increased growth opportunities and broad-based access to multiple sources of capital;
- Strong balance sheet;
- Leading management team at Ashford Trust with proven track record of delivering significant shareholder returns;
- Strong alignment of interest with management through high insider ownership, backed by shareholder friendly corporate governance; and
- A clear and credible strategy for the pro forma combined company.
Bellisario said Ashford forecasts US$18 million to US$30 million of operational efficiencies from a combination of Trust and FelCor, and as part of the proposal, Ashford Inc. is offering a one-year guarantee of up to US$18 million (in the form of reduced base advisory fees) with the guarantee commencing six months after closing.
“While several FelCor shareholders may be opposed to receiving stock in another hotel REIT, management (and we) believe FelCor’s recourse bond covenants could hinder a sale to an all-cash buyer (estimated US$130 million to US$140 million cost to pre-pay the bonds),” Bellisario added. “Additionally, the recent renewal of brand management contracts could also potentially result in less interest to acquire the company from owner-operators. Ashford Trust’s history of acquiring larger portfolios and selling off some of the pieces gives us confidence in management’s ability to create value if a merger is consummated; we also see a scenario where Ashford Trust could potentially sell a few of FelCor’s higher RevPAR hotels to Ashford Prime over time.”
Lastly, Ashford also announced that Douglas Kessler has been appointed chief executive officer effective February 21. Monty Bennett will continue as chairman.