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Marriott and Gaylord in Massive Deal

Marriott buys the Gaylord Hotels brand and will manage the four mega-properties. Is this the deal of the year?

Thursday, May 31, 2012
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Wow! What a deal. In a surprising move announced this morning that has completely shocked hotel industry insiders, Gaylord Entertainment announced it’s selling the Gaylord brand and the management of its four massive hotels to Marriott International.

The agreement, which could be the deal of the year, is for $210 million in cash and is the first major deal for Marriott since Arne Sorenson took over as President and CEO earlier this year. When the sale is complete, Gaylord will reorganize as real estate investment trust (REIT in industry parlance) at the top of 2013.

Gaylord has four mega convention resorts in Nashville, Orlando, Dallas and outside Washington, D.C. A fifth property announced for the Denver area in Aurora, CO will be reevaluated to lessen the financial investment from Gaylord. Our opinion: That property could see a major change or be scuttled entirely.

According to Colin Reed, Chairman and CEO of Gaylord Entertainment said in a conference call this morning the deal represents the “best decision for our company and shareholders given where we sit in the hospitality industry recovery cycle.”

Reed said the company has gone from one hotel brand suffering from a lack of direction 10 years ago to a companywide respected by peers and this move is the best way to unlock maximum shareholder value. Reed added the Board voted 10-0 to make the deal with Marriott and that an auction has been going on for several months that included three other companies. He would not reveal those companies.

“I am particularly delighted to welcome Gaylord to our family. We have watched with admiration on their progress and their development of an attractive portfolio of assets,” said Marriott’s Sorenson. “Gaylord adds something distinct, a brand that caters to very large groups with all in one service offerings that makes it very simple to be a meeting planner. We like the group business and groups tend to be profitable for hotels year in and year out since group demand tends to hold up well in periods of economic weakness.

We believe we have a significant opportunity to add transient business and smaller groups,” he said adding that Marriott Rewards has 38 million members. “I can’t think of another company as good of a cultural fit as Gaylord.”

Sorenson added Marriott has a strong track record of keeping brands distinct and marketed to specific needs and he felt this deal will drive shareholder value for Marriott.

Speaking to the reasons why Gaylord made this deal Reed said that even though the accomplished much as a company and staved off the recession pretty well during the past four years they have not been able to obtain and deploy capital at the amounts necessary to “to develop a conference hotel brand at this level.”

“As growth slowed as result of recession the inefficiency of our cost structure became apparent. Not acting could result in the company being bought at a lower than true value and [that company] would to the same things to get cost reductions and reap benefits for themselves,” said Reed.

Gaylord expects to save $33 to $40 million annually through this deal and will see a net cash positive outcome once the deal is closed.

When the deal closes, Gaylord Hotels will join the Marriott portfolio of brands. Terms of the management agreement call for Marriott to manage the four properties under the Gaylord Hotels flag. The hotels will be incorporated into the Marriott family of brands, be sold by the Marriott International sales team and appear on its websites.

Marriott will receive a management contract with an initial 35 year term, two percent base management fee, and an incentive fee linked to improvement in hotel profitability, according to a press release.

Gaylord will continue to own and operate the Grand Ole Opry, Ryman Auditorium and other attractions as taxable REIT subsidiaries. Nothing will change at these assets of the Nashville community, and Gaylord is fully committed to maintaining the legacy of these historic attractions. As a REIT, the Company will adjust its investment approach on the Aurora, Colorado hotel and convention center project.

By year-end, the Company plans to issue its shareholders a special, one-time taxable dividend of its undistributed earnings and profits, after receiving a private letter ruling from the Internal Revenue Service (IRS). Based on its preliminary analysis, the Company estimates the amount of the earnings and profits distribution to total approximately $415 to $450 million. Gaylord intends to pay 80 percent of the dividend in shares of Gaylord common stock and 20 percent in cash.

The Company expects to incur approximately $55 million in one-time conversion, transaction and severance expense. The sale of the management company and the brand to Marriott International is subject to closing conditions, including the approval by Gaylord's shareholders of proposals that will facilitate becoming a REIT, lender consent to amendments to Gaylord's credit facility, and other customary conditions and regulatory approvals. Gaylord expects to hold a special meeting of stockholders in the third quarter of 2012 for the purpose of voting on shareholder proposals that will facilitate becoming a REIT, amendments to its Certificate of Incorporation or other restructuring. Gaylord will file a proxy statement or other filings with the Securities and Exchange Commission, which will describe the proposals and the REIT conversion.
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