(Bloomberg)—Park Hotels & Resorts Inc. agreed to acquire Chesapeake Lodging Trust in a cash-and-stock deal valued at $2.7 billion, helping Park to secure its position as the second-largest lodging real estate investment trust.
Chesapeake shareholders will get $11 in cash and 0.628 of a share of a Park common stock for each of their shares, for an aggregate value of $31.71 a share, the companies said in a statement Monday. That represents an 8.2 percent premium to Chesapeake’s closing price on Friday.
“Chesapeake’s high-quality portfolio of hotels will accelerate our strategic goals of upgrading the quality of our portfolio and achieving brand, operator and geographic diversity,” Park Hotels Chief Executive Officer Thomas Baltimore said in the statement.
Park Hotels was spun out of Hilton Worldwide Holdings Inc. in 2017 and has been seeking to diversify its portfolio, which consists of 51 properties, all Hilton brands. Chesapeake has 20 properties, including the JW Marriott San Francisco Union Square and the Royal Palm South Beach Miami.
Five hotels will be sold prior to the acquisition’s completion, including both of Chesapeake’s New York City hotels, the Hyatt Herald Square New York and the Hyatt Place New York Midtown South, according to the statement. That would leave the combined company with 66 hotels in urban and resort markets across 17 U.S. states and the District of Columbia.
The deal is expected to close in the second half of this year. Chesapeake will pay a breakup fee of $38.5 million if it terminates the deal in favor of a superior proposal prior to June 4. The breakup fee rises to $62.5 million thereafter.
Park shares fell 3.6 percent of $31.80 at of 10:49 a.m. New York time. Chesapeake shares rose 6.6 percent to $31.26.
Baltimore, who has talked up the benefits of hotel-industry mergers in the past, found a willing seller in Chesapeake CEO James Francis, who signaled his readiness to sell properties during a February earnings call.
“We’re certainly kicking around the idea of a couple of asset sales because, from our perspective, right or wrong, but we think we’re right, it’s relatively attractive pricing out there to sell assets into,” Francis said at the time.
Park, which said it secured a $1.1 billion commitment from Bank of America Corp. to finance the cash portion of the purchase, expects the acquisition to increase adjusted funds from operations per share by 2 percent in 2020 and at least 3 percent in 2021. Those projections include expected cost savings of $24 million in 2020 and $34 million in 2021.
Now that Chesapeake is in play, private equity firms could seek to use their lower cost of capital to come up with a competing offer, Michael Bellisario, an analyst at at Robert W. Baird & Co., wrote in a note Monday. That suggestion recalls Pebblebrook Hotel Trust’s acquisition of LaSalle Hotel Properties last year, in which Pebblebrook had to fend off a rival offer from Blackstone Group LP.
“We don’t see a repeat of that drama,” Baltimore said on a conference call today. “We want to stay as far away from that as possible.”
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