Park Hotels & Resorts Inc.'s planned acquisition of Chesapeake Lodging Trust makes sense on paper for both the buyer and seller, but there is still a chance that a competing buyer will come forward, observers say.
In part, speculation about an all-cash offer emerging to challenge Park's cash-and-stock bid is a reaction to the long and contentious process that led to Pebblebrook Hotel Trust's acquisition of LaSalle Hotel Properties in 2018. On a conference call just after the deal was announced, Park Chairman, President and CEO Tom Baltimore praised Chesapeake's management and emphasized the good working relationship between the two sides, in contrast with the reported chill between Pebblebrook and LaSalle management.
Another difference in the two situations, observers say, is that Chesapeake management has long been rumored to be willing to sell the company. The real estate investment trust formed in 2009 and went public in 2010, led by executives who had sold their previous company, Highland Hospitality Corp., to a private buyer near the top of the last real estate cycle.
As of the end of 2018, Chesapeake had a relatively lean 13 employees, and in 2016 the company was reported to have explored a sale.
"They created that platform to time the market, to buy cheap and ultimately sell the platform," Robert W. Baird analyst Michael Bellisario said. "They've communicated, directly or indirectly, that they don't want to be doing this for another 10 years, and living through a downturn and having to recoup lost stock price."
A Chesapeake representative did not return a call for comment.
By contrast, Baltimore has long argued that some hotel REITs should combine, with the implication that his companies — before Park he was president and CEO of RLJ Lodging Trust — would be buyers.
"Let's just say it's been long thought that Chesapeake would probably be one of the acquired companies," Jeung Hyun, a portfolio manager at Adelante Capital Management, said in an interview. "And just the same way, I think everybody thought, given Tom Baltimore's ambition, the size of his platform, etc., eventually he would be a consolidator."
Bellisario described the transaction as a culmination of Park's efforts, since its spinoff from Hilton Worldwide Holdings Inc. in 2017, to improve its balance sheet and cost of capital. Still, there may be room for another bidder to emerge.
Based on Park's closing stock price on May 3, the last trading day before the deal was announced, the acquisition offer was worth $31.71 per Chesapeake share. Based on the trailing 10-day volume weighted average price of Park's shares as of the same day, the offer was worth an even $31.00. As of the close on May 7, a day on which Park's stock traded down, the offer was worth roughly $30.59.
Meanwhile, Chesapeake's share price closed on May 7 at $31.24. Hyun said the stock price rising over the offer price, even slightly, suggests that some investors are betting that the offer price will also have to rise.
"The market's telling you that there's a possibility that there's somebody else out there," he said. "Probably the markets are giving a decent probability that either Park would have to sweeten the bid a little bit, or that there's potentially a little bit further interest, either private or public."
In a note, Evercore ISI analyst Rich Hightower said there are least one or two other REITs with balance sheet capacity to make a bid for Chesapeake, a cost of capital similar to or better than Park's, and an existing portfolio that fits well with Chesapeake's assets.
"Why wouldn't they take a look at this?" he wrote, adding that the probability of a private equity buyer emerging is low, but "non-zero at this point."
Hightower said in his note that Park is paying "more or less a full price" for Chesapeake with its current offer. Bellisario also said a substantially higher offer from a new bidder is unlikely, but added that an all-cash offer, even one only slightly higher, could be tempting for Chesapeake shareholders.
"There's always somebody out there who has a different view of value and growth, and where the debt capital markets are at, there's always someone who can use leverage to push the numbers a little further," he said. "Our view is that there's value there, probably not way higher than $31.50, but cash is certainly very different in the eyes of shareholders than cash and stock."
The deal calls for Park to receive a $38.5 million termination fee, or roughly 60 cents per Chesapeake share, if Chesapeake accepts another offer before June 4. The fee rises to $62.5 million after that date, but the smaller fee in the short term is "almost enticing people to take another look," Bellisaro said.
The deal stands to diversify Park's portfolio by geography and by operator, reducing Park's exposure to Hilton brands to 84% from 100% — an important consideration for a company that remains closely linked to Hilton in many investors' minds.
For Chesapeake, a transaction fairly close to the company's 52-week closing high of $33.65 per share can give management a good story to tell investors.
"They can tell the shareholders that they did the right thing, they got into the hands of a larger operator, a consolidator, they got them a premium, they've outperformed," Hyun said. "I think the management team can go out close to their highs and feel pretty good about themselves."
Hyun said the conditions that gave rise to the deal could produce further REIT M&A transactions.
"You always have to think about CEOs, what they want to do with their lives," he said. "It's getting fairly late in the cycle, the prices are pretty close to where they were in recent memory. You can sell out, make a little bit of money on the change in control, and then wait for the cycle to play itself out and maybe get back into the market."
"I think," he added, "you're going to see some CEOs decide that it's a good time to take a sabbatical."
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