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Rising Pebblebrook share price could complicate LaSalle-Blackstone deal

LaSalle Hotel Properties said May 21 that it agreed to be acquired by Blackstone Group LP, but the rising share price since then of another potential buyer, Pebblebrook Hotel Trust, could complicate the transaction.

Blackstone's all-cash offer for LaSalle, of $33.50 per share, was slightly behind the valuation of Pebblebrook's cash-and-stock offer to acquire LaSalle at the time the deal was announced, but LaSalle's chairman said at the time that the Blackstone offer's "immediate and certain cash value" helped make it attractive.

Pebblebrook did not increase its offer after LaSalle agreed to Blackstone's but did not bow out of the bidding, either. Instead, the company expressed disappointment that LaSalle had accepted a "significantly" lower offer based on Pebblebrook's then-current share price.

Pebblebrook's offer carries a fixed exchange ratio of 0.92 Pebblebrook common shares for each LaSalle share, with an option for LaSalle shareholders to elect to receive a maximum of 20% in cash. If LaSalle were to back out of its deal with Blackstone, under certain circumstances it would be obliged to pay a Blackstone affiliate $112 million, the equivalent of roughly $1.01 per LaSalle share, under a termination agreement.

Pebblebrook's offer for LaSalle was worth roughly $37.70 per LaSalle share as of the close of trading May 24. After subtracting the termination fee, the offer would be worth $36.69 per LaSalle share, a roughly 9.5% premium to the offer from Blackstone that LaSalle accepted.

"Don't count Pebblebrook out entirely," Evercore ISI analyst Rich Hightower said in an interview, calling the Pebblebrook offer "a pretty compelling valuation for LaSalle" based on Pebblebrook's current share price.

Shares of Pebblebrook and LaSalle were both higher in intraday trading May 25.

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Hightower said it can be difficult, in an M&A situation, to sort through the motivations of various investors, including merger arbitrageurs making bets on various deal scenarios. Still, he said, Pebblebrook shares are trading in a range that suggests some investor or investors are pushing the stock higher to make a Pebblebrook-LaSalle deal more attractive relative to the Blackstone deal.

"If Pebblebrook's shares go higher, the math looks all the more favorable in a stock-for-stock merger," he said. "It's just tough to tell, but I think the conversations happening in the background right now are most likely between LaSalle's board and its major shareholders."

In a further twist, one of those major shareholders is Pebblebrook, which disclosed in March that it owned 4.8% of LaSalle's outstanding shares; Pebblebrook would be excluded from LaSalle's internal discussions over which offer to accept.

Blackstone, which emerged from a field of about 20 potential acquirers LaSalle said it considered, has functioned as an acquirer-of-choice for multiple public REITs in recent years, in large part because, as a well-capitalized private equity fund with multiple real estate strategies and platforms, it is positioned to make competitive cash offers on companies in a variety of property sectors.

Still, Hightower said much of the hotel REIT investor base would like to see a merger between LaSalle and Pebblebrook, in part to signal to other management teams in the space that public-to-public M&A is a viable option.

"In hotels, you've got 20 companies, many of which have overlapping strategies, many of which have a market cap that makes liquidity in trading tougher for some investors," he said, "and there just seems to be no reason that you should have 20 companies existing separately, when probably five or six of them could pair up very easily."

While there is no mechanism to force a REIT's board to accept any given buyout offer or merger proposal, a Pebblebrook-LaSalle deal would at least give ammunition to investors who want consolidation among other companies, Hightower said.

While LaSalle's share price did not rise as sharply as Pebblebrook's in the days after the Blackstone deal was announced, it was trading as of midday May 25 at a price, adjusted for LaSalle's upcoming dividend payment, that was higher than the price Blackstone agreed to pay. That, too, could be an indication that some investors are expecting a higher acquisition offer from one party or another.

Under LaSalle's deal with Blackstone, LaSalle agreed, with certain exceptions, not to negotiate or provide non-public information to a third party in connection with any acquisition proposal. Still, until LaSalle's shareholders approve the Blackstone deal, LaSalle is permitted to negotiate with a third party that has made an unsolicited acquisition offer if LaSalle believes that such an offer constitutes a superior proposal to Blackstone's.

A LaSalle spokesman declined to comment.