TYSONS, VA—Park Hotels & Resorts Inc. and Chesapeake Lodging Trust have entered into a definitive merger agreement under which Park will acquire all the outstanding shares of Chesapeake in a cash and stock transaction valued at approximately $2.7 billion (inclusive of transaction costs).
Upon completion of the merger, the combined company will have an estimated enterprise value of $12 billion, firmly solidifying Park’s position as the second largest lodging REIT while also advancing its strategic goals of portfolio enhancement and diversification, according to the company. The transaction has been approved by the board of directors and board of trustees of Park and Chesapeake, respectively.
Under the terms of the merger agreement, Chesapeake shareholders will receive $11 in cash and 0.628 of a share of Park common stock for each Chesapeake share. The fixed exchange ratio represents an agreed upon price of $31 per share of Chesapeake shares of beneficial interest based on Park’s trailing 10-day volume weighted average price as of May 3, 2019. Based on Park’s closing stock price on May 3, 2019, this represents $31.71 per share of aggregate value to Chesapeake shareholders and represents a premium of approximately 11% to Chesapeake’s trailing 10-day VWAP and approximately 8% to Chesapeake’s closing stock price on May 3, 2019.
Upon closing, Park stockholders and Chesapeake shareholders will own approximately 84% and 16% of the combined company, respectively. The transaction is subject to customary closing conditions, including receipt of the approval of Chesapeake shareholders. The companies currently expect the transaction to close in late third quarter or early fourth quarter of 2019.
“We are thrilled to strategically combine our two companies in a compelling transaction that is accretive for stockholders,” said Thomas J. Baltimore, Jr., chairman/ CEO of Park. “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. This merger provides Park and its stockholders with identifiable synergies and opportunities to drive incremental growth through Park’s proven asset management capabilities. In short, we are expecting to have the same record of success and growth from the Chesapeake assets that we have enjoyed from the Hilton assets we took over in January 2017—and we will be laser focused every day to create long-term value.”
“This merger will be a transformative event for the shareholders of both companies,” said Thomas Natelli, chairman of the Chesapeake Board of Trustees. “We believe the combined company will create a superior platform for delivering exceptional returns to Chesapeake’s existing shareholders, by improving diversification, increasing scale, lowering cost of capital and benefitting from combined synergies. Chesapeake’s management team, under the leadership of CEO Jim Francis, has built a fantastic portfolio of hotels in major markets and has consistently delivered excellent results. We are confident that Park’s leadership team will continue this trajectory with the addition of our portfolio of leading hotels, which will translate into increased value for all stakeholders.”
A Competing Bid Is Possible
“We believe a competing all-cash bid is possible given that Chesapeake is now ‘in play’ and private equity’s lower cost of capital could lead to some groups sharpening their pencils following this morning’s announcement; however, a competing bid from a public hotel REIT appears unlikely, in our opinion,” said Michael J. Bellisario, senior research analyst at Baird Equity Research. “If Chesapeake communicates a superior proposal prior to June 4, the company will be required to pay a $38.5 million termination fee; the termination fee increases to $62.5 million thereafter.”
In addition, Bellisario believes this deal pairs up a willing buyer and seller. “Chesapeake’s management team has long been viewed as a ‘seller,’ and Park has been vocal about the prospects for and benefits of M&A within the sector. As such, the strategic motivations for the transaction should not be a total surprise to industry participants, in our opinion; we believe the announced PK-CHSP combination provides more targeted—rather than broad-based—read-throughs to the group.”
Leadership and Organization
Each of the Board of Directors of Park and Board of Trustees of Chesapeake has approved the merger. Park’s Board of Directors will be increased to 10 members upon closing, with two additions from Chesapeake’s Board of Trustees. Thomas J. Baltimore, Jr., Park’s chairman/CEO, will continue to serve as chairman of Park’s Board of Directors, and Baltimore will also continue to lead the combined company, along with Park’s existing senior management team.
Non-Core Asset Sales
Park plans to sell five non-core hotels prior to the proposed closing, including both of Chesapeake’s New York City hotels—the 122-room Hyatt Herald Square New York and the 185-room Hyatt Place New York Midtown South—in addition to three non-core Park hotels, which are currently under contract. On a pro forma basis that accounts for these sales, the combined company would consist of 66 high-quality hotels located in key urban and resort markets in 17 states and the District of Columbia.
The combined company expects to implement Park’s asset management initiatives to create incremental value across Chesapeake’s existing portfolio through already-identified opportunities. Those initiatives include remixing the demand mix by increasing Chesapeake’s group segmentation and replacing lower-rated contract business, enhancing food and beverage profitability, driving ancillary income, and sourcing additional cost savings.
Overall, Park has identified approximately $24 million of potential EBITDA upside in 2020 and approximately $34 million of potential EBITDA upside in 2021 across Chesapeake’s portfolio, including approximately $17 million of annual G&A savings. Over time, the company expects additional value creation will be driven by select ROI projects, potentially including the repurposing of underutilized space as meeting space expansions, adding additional keys, energy efficiency projects and brand repositioning at select properties.
The combined company also expects to benefit from enhanced scale in markets in which both companies currently have a presence, such as San Francisco, and from diversification of brand, operators and geography, which translates into the identification and implementation of best practices across the portfolio.