Strategic Hotels Turns From Penny Stock to Deal Target
Shares of the owner of luxury hotels jumped to an almost five-year high of $9.03 following a report last week that the Chicago-based company may put itself up for sale. JMP Group Inc. said Strategic Hotels could fetch as much as $13 a share. That price would value the company’s equity and net debt at 26.5 times profit, the highest multiple among similar-sized hotel deals since 2006, according to data compiled by Bloomberg.
While Strategic Hotels has rebounded from the record losses it had during the financial crisis, shareholder Orange Capital LLC has been pushing for a sale of the $1.8 billion company since February as the best way to boost shareholder value. With high-end properties such as the Essex House in Manhattan and Ritz-Carlton resorts in California, Strategic Hotels could lure buyout firms or sovereign-wealth funds, Stifel Financial Corp. and Evercore Partners Inc. said.
“They have a quality portfolio,” Ian Weissman, a New York-based analyst at International Strategy & Investment Group LLC, said in a telephone interview. “You might have buyers out there that are willing to pay a premium for that.”
Strategic Hotels, a real estate investment trust, owns or holds stakes in 18 high-end hotels including the JW Marriott Essex House Hotel, the Manhattan hotel on Central Park South that it acquired with funding from private-equity firm KSL Capital Partners LLC in September. The company’s properties are run by management firms such as Loews Corp. (L), Marriott International Inc. and Ritz-Carlton Hotel Co.
Shares of Strategic Hotels reached as low as 61 cents in March 2009 as a collapse of U.S. credit and real estate markets helped fuel the worst financial crisis since the Great Depression. Although the stock has yet to reach its pre-crisis peak in 2007 of $24.27, it has rebounded as losses narrowed.
“The debt markets were shut and in theory if they had to refinance their debt at that time, they wouldn’t have been able to,” Rod Petrik, a Baltimore-based analyst at Stifel, said of Strategic Hotels, which currently has $1.3 billion in debt. Four years ago, the stock was “trading at an auction value, but once the tide started to subside and the capital markets came back,” investors saw more value in the company.
Strategic Hotels’s shares jumped 17 percent last week for their biggest two-day gain in three years after Reuters reported that the company hired brokerage Eastdil Secured LLC to explore a sale, citing two sources familiar with the matter that it didn’t identify. Eastdil is a unit of Wells Fargo & Co. (WFC)
Megan Hakes, a spokeswoman for Strategic Hotels -- whose properties also include the Loews Santa Monica Beach hotel and the London Marriott Hotel Grosvenor Square -- declined yesterday to comment on whether the company was exploring a sale process.
Orange Capital, with a stake of about 3.65 percent in Strategic Hotels, said this week it hired investment bank Houlihan Lokey Inc. to help solicit buyers for Strategic Hotels.
“It’s an amazing portfolio in that it’s almost impossible to replicate this kind of asset base,” Daniel Lewis, co-founder of the New York-based hedge-fund firm, said in a phone interview this week. “The best price for this is not as a listed stock. It’s an asset that belongs in the hands of long-term deep pockets.”
The investment firm has been pushing for a deal since at least February, when it urged an immediate sale of the company as the “best alternative” to maximize value, estimating the hotel owner could fetch as much as $14 a share in a transaction. The letter came about three months after Laurence Geller, leader of Strategic Hotels since its formation in 1997, abruptly stepped down as chief executive officer, a shift Will Marks of JMP said removed a hurdle for potential buyers.
While Strategic Hotels responded to Orange Capital saying it “strongly disagrees” with some of the investment firm’s conclusions, the company’s board voted last month to accelerate the expiration of a takeover defense.
JMP’s Marks said Strategic Hotels could be valued at as much as $13 a share in a takeover, a 45 percent premium to yesterday’s closing level of $8.94. A bid at that price would value the company’s equity and net debt at 26.5 times the hotel owner’s $161.5 million in earnings before interest, taxes, depreciation and amortization in the last 12 months.
The only deal for a lodging company or hotel real estate investment trust valued at more than $1 billion that fetched a higher multiple was the purchase of Four Seasons Hotels Inc. in 2007 by funds tied to Microsoft Corp. co-founder Bill Gates and Saudi Arabia’s Prince Alwaleed bin Talal, data compiled by Bloomberg show. The bid for Four Seasons was announced in 2006.
Today, shares of Strategic Hotels fell 3.2 percent to $8.65.
Potential suitors for Strategic Hotels could include private-equity firms, sovereign-wealth funds and overseas conglomerates looking to expand their U.S. presence, said Smedes Rose, a New York-based analyst at Evercore. A bid of $11 a share would be a “reasonable starting point” in a Strategic Hotels takeover, he wrote in a June 13 note to clients.
“It has a portfolio that includes a lot of hotels that are considered basically iconic and irreplaceable,” Rose said in a phone interview. “Those kinds of properties would be of interest.”
A private-equity firm could likely sell Strategic Hotels’s resort properties at a premium after a deal, offering opportunities for further value creation, Weissman of ISI said.
TPG Capital, Blackstone Group LP (BX) or Carlyle Group LP (CG), which a person familiar with the matter said is seeking to raise $4 billion for a new real estate fund, could be among interested buyers, Weissman said in a June 13 note to clients.
Representatives for Fort Worth, Texas-based TPG, New York-based Blackstone and Washington-based Carlyle declined to comment on whether their firms would be interested in buying Strategic Hotels.
A deal for Strategic Hotels at $13 a share would be “pricey,” Marks, a San Francisco-based analyst at JMP, said. Still, the quality of the hotel owner’s properties and a lodging-market rebound could help justify the cost, he said.
“Some buyers ignore current valuation,” he said in a phone interview. Luxury resort owners like Strategic Hotels tend to attract acquirers “willing to pay a very high multiple in private markets.”
Nightly room rates at luxury hotels have climbed 5.7 percent this year through April, according to Hendersonville, Tennessee-based research firm Smith Travel Research Inc. That was the biggest gain among the seven hotel categories that the company tracks, the data show.
Low interest rates and investor demand for higher-yielding assets such as commercial real estate and hotels also mean lofty valuations are less likely to deter buyers, Marks said.
That means now is an attractive time for Strategic Hotels to sell itself, Lewis of Orange Capital said.
“To me, it’s a question of what is the risk of hanging around for the cyclical peak versus the fact that someone can raise a large amount of low-cost capital and buyers are willing to pay up for trophy assets,” Lewis said.
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