RLJ Lodging Trust (NYSE: RLJ) said April 24 that it has agreed to buy FelCor Lodging Trust Inc. (NYSE: FCH) in an all-stock transaction that values FelCor at approximately $1.2 billion.
The merger is expected to create the third-largest public lodging REIT. RLJ said the transaction will create a combined company with a pro-forma market capitalization of about $4.2 billion and a total enterprise value of $7 billion. The merged company will have ownership interests in 160 hotels.
Under the terms of the agreement, each share of FelCor common stock will be converted into 0.362 shares of newly issued RLJ common stock. FelCor shares closed on April 21 at $7.37, while RLJ shares closed the same day at $23.80.
Under the terms of the deal, FelCor will become a wholly owned subsidiary of RLJ. RLJ shareholders will own 71 percent of the combined company, with FelCor shareholders owning the remaining 29 percent. The deal is expected to close in the fourth quarter.
During a conference call, Ross Bierkan, RLJ president and CEO, said merging with FelCor was not a recent idea.
“We’ve discussed this often internally over the past five years, with the view that the majority of its portfolio fits very well with our long-term strategy,” Bierkan said.
Steven Goldman, who became FelCor CEO in February, pointed out that the timing of the deal makes sense strategically.
“The lodging industry is mature, cyclical and we are in a challenging period in the cycle to grow. Scale matters, and it was unclear to me whether FelCor could effectively compete over the long term at its current size and with its current cost of capital,” he said.
Goldman said the combined company will be a “formidable competitor” in the lodging REIT sector.
Competition from Ashford Hospitality
RLJ is not the first REIT to pursue a merger with FelCor. Earlier this year, Ashford Hospitality Trust, Inc. (NYSE: AHT) launched a hostile bid to acquire the company.
Michael Bellisario, analyst at Robert W. Baird & Co., said that while it is possible that Ashford Trust increases its bid for FelCor, “all else equal, we believe FelCor’s board prefers the combination with RLJ.” He pointed out that the pro forma company will have lower leverage than under a merger with Ashford Hospitality and will be internally advised.
Ryan Meliker, an analyst at Canaccord Genuity Inc., said he was surprised by the merger announcement. He noted that RLJ has historically invested in select-service and focused full-service properties, whereas FelCor’s portfolio has gradually moved away from those assets in recent years.
“While the deal appears to be accretive to funds from operation (FFO), increased scale seems to be the driver of the deal more than anything else,” Meliker said.
According to William Crow, an analyst at Raymond James, benefits of the deal include added brand and market diversification. In particular, he said the deal would increase RLJ’s exposure to Hilton’s Embassy Suites chain.
“We like that the transaction gets RLJ shares back on investors’ radar screens (and) is a good start towards much needed industry consolidation,” Crow said.
Wes Golladay, an analyst at RBC Capital Markets, said he hopes the RLJ/FelCor deal leads to additional consolidation in the sector. "Right now we have a lot of smaller companies and companies with similar strategies. It's been a tough cycle for lodging investors. A lot of the stocks are where they were a decade ago, so mergers and acquisitions are needed," he noted.