Ashford Trust seeks FelCor takeover
 
Ashford Trust seeks FelCor takeover
21 FEBRUARY 2017 11:14 AM

Ashford Hospitality Trust officials are seeking to acquire FelCor Lodging Trust and are willing to take over a majority share of FelCor’s Board of Directors to accomplish that goal.

DALLAS—Officials with Ashford Hospitality Trust see the potential in FelCor Lodging Trust’s portfolio of properties and believe they haven’t been managed to their full potential. So officials with Ashford Trust are looking to purchase FelCor in a move they believe will drive value to shareholders of both companies.

Ashford officials made a series of announcements Tuesday morning, all of which related to a nonbinding proposal to buy FelCor for $9.27 per share in an all-stock deal. Most of that deal, $9.12, would be Ashford Trust shares, while the rest would represent shares of Ashford Inc.

Ashford Trust President and CEO Douglas Kessler said on a Tuesday morning call with investors and analysts the two companies have been negotiating since October for a possible deal, but FelCor officials have been unwilling to share property-level financial data and have been “unwilling to engage in good faith negotiations,” which spurred Ashford to go public with its latest proposal in order to win favor with both companies.

So to counteract FelCor officials’ seeming disinterest in the deal, Ashford is pursuing a plan to place seven members on FelCor’s Board of Directors during the company’s upcoming annual shareholders meeting and gain majority control. Kessler said the goal for that group would be to at least give the proposed sale greater consideration.

“The list was presented to FelCor within the nominating window,” he said. “We’re prepared to have this slate run to obtain a majority control of the board with the goal that they’d hold the fiduciary duty to give the sale of the company, including our proposal, serious consideration.

The proposed deal would result in “a must-own (real estate investment trust) with a trading multiple more in line with our peers,” Kessler said during the call.

FelCor officials declined comment for this story but later released a statement saying they were unable to reach “mutually beneficial terms” when negotiating with Ashford Trust.

As of press time, Ashford Trust was trading at $7.62 per share, down 1.8% year to date. Meanwhile, FelCor’s stock enjoyed a spike following Ashford’s announcement, trading at $7.87 as of price time, down 2.4% year to date but up 8.2% compared to a day earlier.

What the combined company would look like
During the call with investors Tuesday morning, Kessler said FelCor’s portfolio has long performed significantly worse than Ashford Trust’s at driving profitability, and he said Ashford’s ability to cut costs and drive earnings should represent significant value to shareholders of both companies.

“FelCor’s standalone strategy is uncertain,” he said “Their plan for growth doesn’t address the history of subpar flow-through performance, and (the company lacks) balance sheet management and the ability to use it strategically.”

Kessler was particularly critical of FelCor’s recent purchase of New York properties, citing The Knickerbocker by name and saying the transactions were ill-advised and an example of the company trying to “buy” higher revenue per available room instead of focusing on profitability. Kessler said should the acquisition go through, Ashford would try to sell those New York properties.

The primary benefits of the transaction would be “size, scale and focus,” Kessler said.

Based on the data provided in the call and an accompanying presentation, a combined Ashford Trust/FelCor would be among the largest hotel real estate investment trusts in the country. It would be the largest in terms of properties, with 158, and the second largest in room count, with more than 36,000 keys, falling only behind Host Hotels and Resorts.

Kessler said this would give the company greater negotiating power and would also give it the opportunity to realize significant synergies.

Kessler promised between $18 million and $30 million in “near-term G&A and operational synergies” and that would be backed up with an $18 million guarantee from Ashford Inc.

Ashford officials also promised a greater level of corporate governance as part of the deal, and Kessler said his appointment as CEO, which went into effect Tuesday, is a sign of that. He said investors were looking for Ashford Trust to separate the CEO and chairman roles, both previously held by Monty Bennett. Bennett will stay on as the chairman of the board.

Ashford officials criticized the FelCor board’s decision to appoint Steven Goldman as CEO while the two companies were in negotiations.

Bennett said the source of the criticism is not Goldman’s qualifications for the job but the fact that his contract includes a clause for a payout in the event of a transaction. Kessler said that clause drove Ashford officials to reduce the amount of their proposal.

What analysts think
In comments provided to investors, analysts were quick to praise the possibilities of a hostile takeover of Felcor by Ashford.

Canaccord Genuity Group said the company thinks it’s a “good deal” in part because “management has a strong track record of making portfolio transactions accretive.”

Baird Equity Research analysts were positive but not enough to move their price target.

“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 complete given that (1) Trust’s discussions with FelCor appear to have stalled since they were first initiated in October and (2) FelCor’s recent appointment of Steve Goldman as CEO complicates the matter,” they wrote.

Analysts with SunTrust warned the process likely won’t be easy, and that could mean the ultimate price tag could increase if the deal is consummated.

“AHT could be in for a fight and we would not be surprised to see the offer go up if AHT is serious about this acquisition. We suspect activist investors will also push for a FCH sale,” the analysts wrote.

3 Comments

  • William February 21, 2017 3:04 PM Reply

    The offer is this: stockholders in FCH can swap their stock at $9.27 a share (which is below the DCF value of their FCH's portfolio) for stock in another company with a track record of poor corporate governance (AHT versus Sessa Capital). Why would any stockholder do this?

    If AHT is serious then an offer with at least some cash around $10/share may start to make sense.

  • Eastman February 22, 2017 6:26 AM Reply

    Does anyone really imagine that this Transaction will create any positive value whatsoever - besides for the top Management?

  • Bill February 27, 2017 7:50 PM Reply

    With changes that are underway at FelCor, it would seem that FCH stockholders would be better off rejecting the AHT offer.

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