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Despite a dearth of offers, FelCor Lodging repeatedly rebuffed 1 buyer

FelCor Lodging Trust Inc.'s adviser, Bank of America Merrill Lynch, spoke with more than 20 entities about acquiring or merging with the real estate investment trust in the months after its CEO resigned, but only two showed continued interest, according to a company filing.

The chairman and CEO of one of those finalists, FelCor's hotel REIT peer Ashford Hospitality Trust Inc., requested a lunch meeting with FelCor's chairman to discuss a merger on the same day FelCor President and CEO Richard Smith announced his retirement, FelCor and RLJ Lodging Trust said in a registration statement. Yet FelCor executives repeatedly expressed their discomfort with Ashford Trust's management structure and responded to its interest by soliciting more offers.

FelCor representatives contacted several other potential strategic counterparties more than a month after the Sept. 20, 2016, meeting between Ashford Trust's chairman, Monty Bennett, and FelCor's chairman, Tom Corcoran Jr. One of them, RLJ, would eventually reach a deal for an all-stock acquisition of FelCor.

Ashford Trust declined to comment on the filing, and FelCor declined to comment beyond the filing.

Besides RLJ and Ashford Trust, a third entity, referred to in the filing as "Party X," proposed contributing some of its hotels to FelCor in exchange for FelCor equity. Those discussions ended without a formal proposal.

FelCor agreed to pay Bank of America Merrill Lynch an estimated fee of roughly $25 million for its services, all but $1.5 million of which is contingent upon the completion of the deal. Barclays, which represents RLJ, will receive a fee of roughly $11 million, with all but $1 million payable upon the deal's consummation.

Bennett, who has since stepped down as Ashford Trust's CEO, remains the company's chairman. At the time, he was chairman and chief executive at both Ashford Trust and its external adviser, Ashford Inc. Bennett has been a vocal proponent of external REIT management, a structure that is viewed with skepticism by many REIT-dedicated investors. Ashford Trust's offer for FelCor included Ashford Inc. shares owned by the REIT, though Ashford Inc. itself was not a party to the transaction.

The negotiations between FelCor and Ashford Trust were contentious at times, with Ashford Trust launching a bid to replace FelCor board members, and FelCor pushing for, and then rejecting, a cash component in Ashford Trust's acquisition offer.

According to the filing, FelCor management was cool to Ashford Trust's overtures throughout the process, even asking if Ashford Trust would end its external management agreement with Ashford Inc. in the event of a deal. Ashford Trust declined. Separately, according to the filing, Ashford Trust asked FelCor to make an announcement "on the positive aspects of [Ashford Trust's] high leverage and external management structure," a request that was also declined.

In one meeting with Ashford Trust, FelCor lead independent director Christopher Hartung, who is also a director at Lazard Asset Management, told Bennet that Ashford Trust and FelCor "have different philosophies regarding external management, leverage, conflicts of interest, governance and other matters," the filing said.

Because both Ashford Trust's and RLJ's offers for FelCor included stock, their share prices were a concern throughout the process. The filing notes that an Ashford Trust offer worth $9.27 per FelCor common share on Feb. 21 declined in value to roughly $7.81 per share by Feb. 24, after an Ashford Trust earnings report disappointed some investors.

RLJ's representatives at Barclays, meanwhile, proposed a stock-for-stock merger on April 6 with an exchange ratio of 0.368 RLJ common shares for each FelCor share. They later reduced that ratio to 0.362 RLJ shares for each FelCor share, a consideration worth roughly $8.54 per FelCor share at the time the two sides executed their agreement on April 23.

Ashford Trust said April 21 that its final offer was worth $8.25 per FelCor share, with half the consideration in cash. FelCor executives balked, in part because of Ashford Trust's higher leverage and in part because Ashford Trust's offer would have required it to raise roughly $1.8 billion in new financing and delay the deal by four weeks for financing commitments and due diligence, according to the filing. RLJ, in contrast, was prepared to enter into the merger agreement right away.

Both RLJ and FelCor shareholders will still have to vote on the transaction. In the weeks since it was announced, RLJ's share price has fallen: As of the June 5 market close, the company's stock traded at $20.68 per share. Accordingly, the company's offer was worth approximately $7.49 per FelCor share as of that date.