NEW YORK––Tarsadia Capital, LLC together with its affiliates, associates and funds it manages (“Tarsadia” or “we”), is one of the largest shareholders of Extended Stay America, Inc. (NYSE: STAY) (“ESA” or the “Company”) and ESH Hospitality, Inc. (“ESH” and together with the Company, the “Paired Entities”), beneficially owning approximately 3.9% of ESA’s outstanding shares. Tarsadia and various of its affiliates have been investors in the hospitality and lodging industry for over four decades.
Tarsadia today announced that it has filed a preliminary proxy statement to use in conjunction with its efforts to solicit votes in opposition to the Paired Entities’ proposed sale (the “Merger”) to Blackstone Real Estate Partners (“Blackstone”) and Starwood Capital Group (“Starwood”).
Notably, two of ESH’s very own directors – Neil Brown and Simon Turner – voted AGAINST the Merger and insisted that their opposition be disclosed to shareholders. These directors, who have inside knowledge of the Paired Entities’ many opportunities and all of its risks, concluded that it was the wrong time to sell the Paired Entities and that the merger consideration was “insufficient.” They further concluded that the Paired Entities could “generate superior value by executing [their] business plan.”
As described more fully in its preliminary proxy filing, Tarsadia believes:
- The Timing of the Merger is Wrong
- The tailwinds of COVID vaccine distribution, pent-up travel demand and fiscal stimulus create a massively positive backdrop for lodging companies over the next several years.
- Further, with capital returns from over $100 million in contracted asset sales, $75 million in tax returns and an under-levered balance sheet compared to industry peers, the Paired Entities are ideally positioned for above-market returns.
- The Price is Wrong
- The sale to Blackstone and Starwood, if completed, would conclude ESA’s seven years as a public company at a price below its original IPO price.
- On a forward EBITDA basis, the proposed price is the lowest transaction multiple in the U.S. lodging space in more than five years.
- The proposed transaction price of $19.50 per share values ESA at a 11.6x consensus 2022E EBITDA, a 36% discount to the current median trading multiple of its lodging peers (18.0x) and a 21% discount to the next lowest peer, Apple Hospitality REIT.
- The Boards of the Paired Entities Relied Upon a Flawed Fairness Opinion
- Goldman Sachs, the Paired Entities’ financial adviser, departed not only from industry convention, but its own typical methodology of including a comparison of the target company’s acquisition valuation relative to publicly traded peers or to precedent transactions.
- Tarsadia reviewed the six significant acquisitions of U.S. public companies in the lodging space that included a fairness opinion by the target company’s financial advisers dating back to 2015. In each of those fairness opinions, the financial adviser included a comparison of the target company’s valuation relative to publicly traded peers or to precedent transactions.
- Goldman Sachs did not selectively exclude certain transactions or public companies in its valuation work, they omitted the entire lodging industry altogether to mask STAY’s discounted valuation relative to peers.
- The Process Has Been Inadequate
- According to the Company’s own proxy statement, over the course of the last four years, the Paired Entities’ Boards have only reached out to two possible acquirers other than Blackstone and Starwood.
- Goldman Sachs confirmed in its fairness opinion that it did not reach out to any other potential buyers during this sale process and was not asked to do so.
- The Boards Failed in their Duty of Reviewing All Potential Strategic Alternatives
- On February 26, 2021, the date of the Paired Entities’ most recent earnings call, President and CEO Bruce Haase articulated a bullish view of the Paired Entities’ real estate. He noted “We believe our real estate portfolio has significant value creation upside to our shareholders, that is not reflected in the current price of our shares.”
- According to the Company’s own proxy statement, at a February 5, 2021 meeting, the Paired Entities’ Boards specifically considered the sale of 156 hotels at “average multiples of 2019 Adjusted EBITDA of 14.0x, 16.0x and 18.0x, resulting in illustrative total sale proceeds to the Paired Entities of approximately $1.6 billion, $1.9 billion and $2.1 billion.”
- Despite this asset sale strategy having the potential to create substantial value for STAY shareholders, the Company’s proxy indicates that “no conclusions were reached at this meeting with respect to potential next steps, and the Boards determined to discuss the topic at their next regularly-scheduled Board meetings several days later.” Unfortunately, the Company’s preliminary proxy makes no further mention of the planned follow-up discussion on the real estate sales, depriving shareholders of a thorough assessment on the strategic value of STAY’s real estate assets.
- Tarsadia had nominated three exceptional board candidates that could have assisted STAY in achieving its full potential. The ESA Board did not even interview these candidates or seek to understand their suggestions for value creation before rushing into the Merger and cancelling the 2021 Annual Meeting.
Tarsadia issued the following statement in connection with this filing:
“There is no reason to sell now, and no reason to sell at this price. STAY has excellent potential and, with an improved Board of Directors, can deliver lasting value for shareholders by pursuing other paths. We look forward to speaking with our fellow shareholders about this once we disseminate our definitive proxy statement.”