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Hotel REIT Duel Ends in Inland’s Favor

Another M&A contest in commercial real estate has drawn to a conclusion, this time with the late-coming suitor besting an original offer to take the prize. In March, Oak Brook, Ill.-based Inland Capital Markets Group Inc. made an offer for Winston Hotels Inc. at $15 cash per share, or about $850 million including transactions costs, and now Winston’s board of directors has accepted the offer early this week.

Winston, based in Raleigh, N.C., had accepted an acquisition offer in February of $14.10 cash per share by Wilbur Acquisition Holding Co. LLC, an affiliate of Och-Ziff Real Estate and Norge Churchill Inc. With the acceptance of the Inland offer this week, however, that deal is off. Now that Inland’s offer has triumphed, it has to pay about $11 million in a breakup fee to Och-Ziff, plus about $9 million in expenses. Och-Ziff declined to comment for this story.

“The other party [Och-Ziff] had the right to match the $15 a share offer, but elected not to,” says Jay Smith, partner and co-chair of DLA Piper’s Corporate and Securities practice group, who was lead counsel in the Inland-Winston transaction. “That was a little unusual, since first bidders often exercise their right to match a later bid.”

All together, it took about 30 days for Inland to put together and execute its rival bid for Winston, according to Smith. “Typically a bidder coming in later needs to work quickly, and we did,” he says.

“Fifteen dollars is a more accurate reflection of Winston’s value,” says David Loeb, senior research analyst with Robert W. Baird & Co. “But we didn’t see value in anyone making a higher offer than that, because it wouldn’t have been justified by Winston’s assets.”

Currently, Winston owns either a partial or full stake in 53 hotels in 18 states, including Marriott and Hilton flagged properties, for a total of about 7,200 rooms. The company is also a significant creditor to other hotel owners, holding about $52.1 million in loan receivables.

One of the probable reasons that Inland bid higher, Loeb says, is that it seems to value Winston’s lending business — primarily mezzanine loans to other hoteliers — more highly than Och-Ziff does.

Loeb adds that the rival offer also better recognizes the value in the REIT’s recent expansion into markets with relatively high barriers to entry, which is a shift in strategy for a company that had previously owned a largely suburban portfolio. Since 2005, Winston has opened hotels within the cities of Baltimore and Chicago and is building two properties in Manhattan.

With 966,644 of the REIT's shares, Winston founder and CEO Robert Winston III is the company's largest individual shareholder, and will be one of the biggest beneficiaries of the sale. All that remains now is for Winston’s stockholders to approve the new deal. It’s anticipated that will happen sometime in the third quarter of this year.

The transaction is one of a number of major hotel property acquisitions early this year, as investors desire to take advantage of still-strong hotel occupancies and revenues. Morgan Stanley Real Estate swallowed CNL Hotels & Resorts Inc. in January for $6.6 billion, while ING Clarion Partners has inked a deal to buy Apple Hospitality Two Inc. for about $890 million.

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