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Acquisition Target

Ashford Hospitality’s Hostile Bid For FelCor May Be Too Good To Pass Up

Wednesday, February 22, 2017
Dennis Nessler
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Last year was relatively quiet for hospitality REITs with many sitting on the sidelines and generally eschewing significant investment or acquisition activity, not to mention major mergers. As recently as the ALIS Conference, however, many industry observers were predicting this year to be quite different and it seems they may be correct.

Earlier this week, news surfaced that Ashford Hospitality Trust had submitted a hostile bid to acquire FelCor Lodging Trust following months of unsuccessful negotiations between the two companies to join forces. In October the two publicly traded hospitality REITs entered into a mutual non disclosure agreement to discuss a potential merger, but from the perspective of Ashford at least, FelCor never seriously considered any kind of deal and didn’t negotiate in good faith.

The fact of the matter is FelCor is a company very much in flux at the moment, albeit with a solid portfolio of high-end product in major gateway cities. Consider that last month Tom Corcoran—who has been the face of FelCor since co-founding the company’s predecessor in 1991 and taking the current company public in 1994—opted not to stand for re-election to the company’s Board of Directors essentially cutting ties with the company he helped create.

But the final straw for Ashford—which has proposed a stock purchase for a total consideration of $9.27 a share, a 28 percent premium over FelCor’s current price—seems to have been the surprising hire of embattled long-time hospitality executive Steven Goldman as CEO.

Goldman, you may remember, was entrenched in the Hilton/Starwood trademark infringement suit over the launch of Hilton’s Denizen brand and was ultimately dismissed from his role as Hilton’s head of global development and real estate. Having been exiled from Hilton, he took a job in Paris, France as CEO of Starwood Capital’s Groupe de Louvre. Goldman is slated to take over as CEO of FelCor on March 1.

Ashford Hospitality, which already owns 4.5% of the outstanding common shares of FelCor, is accusing the company of extending brand management contracts thereby reducing overall asset value and generally mismanaging its portfolio of nearly 40 hotels as well as its balance sheet. FelCor sold 8 hotels in 2015 for some $225 million completing a major repositioning of its portfolio, which now includes the Knickerbocker hotel in New York’s Times Square. The trophy asset was opened by FelCor in 2015 following its highly publicized acquisition.

If the merger were to through, it would give Ashford a portfolio of roughly 160 hotels, and make it the second largest hospitality REIT by room count and third largest in enterprise value. However, lodging REIT analysts seem to be mixed on whether or not a merger will actually come to fruition.

According to Canaccord Genuity REIT analyst Ryan Meliker, however, the deal may make more economic sense to FelCor than the status quo. “It is unclear whether a deal will move forward, but we don’t expect any other suitors to come in at a higher price and given the 28 percent premium being offered, we believe FCH shareholders are likely more inclined to sell to Ashford than to continue to have FCH operated as a going concern,” he said.

FelCor has said its Board is current reviewing the proposal from Ashford. Meanwhile, Ashford yesterday nominated seven independent candidates for election to FelCor’s Board of Directors during the company’s 2017 annual meeting of stockholders in the hopes of convincing other shareholders of the value that Ashford could bring to the company.

Within the industry, we’ve seen the brand landscape change dramatically as the result of consolidation and many wondered if the owners would follow suit. This may be just the beginning. Ashford CEO Douglas Kessler—who ironically was named CEO earlier this week as well after years of serving the company, most recently as president—asked in a statement, “If the industry doesn’t consolidate these two entities here and now, then when and where?”

It’s a compelling question, I guess we just have to wait for the answer now.
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Dennis Nessler    Dennis Nessler
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