(Bloomberg) – Extended Stay America Inc.’s plans to sell to Blackstone Group and Starwood Capital Group are on the rise. Three other major shareholders say they plan to vote against the deal.
SouthernSun Asset Management LLC, Cooke & Bieler LP and River Road Asset Management LLC all plan to oppose the deal as the $ 6 billion purchase price undervalues the company. They also argue that this comes at a time when the outlook for Extended Stay is good and they have concerns about why the company decided to sell it.
Michael Cook, SouthernSun’s chief executive officer, said in a letter to clients Tuesday that his company had never felt compelled to write a formal letter against a corporate action in its portfolio in over 32 years. He said the evaluation, timing and process surrounding the extended stay deal over the past week was sufficient to prompt him to do so.
“The deal underestimates Extended Stay’s business, contradicts management’s judgment, comes at a deeply inconvenient time relative to the market recovery, and was the result of a flawed and abbreviated due diligence process,” Cook said in the letter, a copy from which was obtained from Bloomberg.
William Weber, partner and portfolio manager at Cooke & Bieler, said he was also opposed to the deal. According to Bloomberg, Cooke & Bieler had a 1.8% stake in Extended Stay at the end of December.
“The offer fundamentally undervalues the business. Covid was clearly a detour for the company, but we were excited to see the prospect of Extended Stay finally returning to net unit growth system-wide, ”Weber said in an interview.
Representatives for Blackstone, Starwood and Extended Stay were not immediately available for comment.
Blackstone and Starwood agreed last week to purchase Extended Stay for $ 19.50 per share. This corresponds to a premium of 15% compared to the time at which the shares were previously closed. This would be the biggest deal in the hotel industry since the decimated Covid-19 pandemic.
Extended Stay rose 0.5% to $ 19.84 at 10:28 a.m. on Tuesday in New York, giving the company a market value of approximately $ 3.5 billion.
Justin Akin, portfolio manager at River Road, which owns 3.2% of Extended Stay, said he also thinks the price is low and is rejecting the deal under the current conditions.
“It’s a discount on any type of historical M&A deal in the room. Obviously, they did well in terms of occupancy during the Covid downturn and clearly outperformed their peers, ”Akin said in an interview. “We are not against a snack. We want to see fair value for it and we think $ 19.50 isn’t that. “
Two of the top 10 investors – Tarsadia Capital LLC and Hawk Ridge Capital Management – have already spoken out against the deal. In total, the opposing shareholders hold nearly 13% of the company’s outstanding shares.
According to Bloomberg, SouthernSun had a 1.9% stake in Extended Stay at the end of December. Cook said in the letter that he believes that after three CEOs, a distracting strategic review, and the pandemic last year, for the first time since SouthernSun’s initial investment in 2017, Extended Stay has a reasonably clear path forward.
Cook asked why the company would sell at a time when the economy is recovering, expectations are high that the accommodation industry will benefit if Americans get the vaccine, and sales of Extended Stay assets are resuming has been. He said he was also concerned that the board had not solicited any other offers and that the transaction contained a clause prohibiting advertising to other buyers.
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