LaSalle Hotel Properties (LHO) – Merger Arbitrage – 5% Upside

Current Price – $34.57

Merger Consideration – $36.28

Upside – 5%

Expiration Date – 6th of September

Latest Offer from PEB

This idea was shared by Jason

 

We think the current setup at LHO is an attractive “special situation”. LaSalle is a hotel REIT that has some very attractive assets in central urban locations but has been mismanaged. On 3/31/18, another hotel REIT, Pebblebrook Hotel Trust (PEB) proposed an all-stock merger which was quickly rejected. The merger valuation was raised by Pebblebrook in April ’18 and then Blackstone (BX) came over the top in May’18 with an all-cash offer of $33.50, which the board accepted.

Pebblebrook has since tried to sweeten the offer several times with premium/ a larger cash component. As we sit here today, a vote is set for 9/6 for shareholders to approve the BX offer and the board is reviewing the latest Pebblebrook offer. We think there is little chance the BX offer is approved by shareholders, particularly since 13D filer HG Vora has publicly said it won’t support the deal (8% owner) and Pebblebrook has accumulated a 9.8% stake of its own. Additionally both Glass Lewis and ISS recommended voting against BX deal, suggesting that at least index funds are also likely to vote against the BX deal (Vanguard and Blackrock own combined 29% of LHO stock)

We think this plays out one of two ways – either BX comes back with a superior cash offer or the BOD caves and accepts the sweetened Pebblebrook offer. In any case, we think downside is roughly (3%) back down to the existing BX offer and upside is 5%+ depending on how things develop between now and the 9/6 vote. Given the short timeline here to a catalyst, the IRR is in the 300% range under our base cash.

 

LHO merger calculations

10 COMMENTS

  1. K.Simon

    If the shareholder decision is 9/6, isn’t there an opportunity to buy a 9/21 call and see what happens? Downside is limited to call price and potential upside is only marginally diminished. Thanks!

    1. dt

      Yes, I do have a small hedged position as I find the situation compelling and consider the downside to be limited. However, me having or not having a position should not influence your decision in any way (I have been been wrong many times) – base it on the merits of the case.

    1. dt

      The press release sounds as if the board is encouraging Blackstone give higher offer. I would expect more news to follow shortly.

  2. Alex15

    I have some questions:
    Why is the board so eager in proceeding with Blackstone’s offer?
    Would Blackstone be allowed to make an increased bid in case the merger is voted down?
    What is the standalone value for LHO?

    1. dt

      This merger could still take a while. Merger agreement needs to be signed and then approved by shareholders and any regulators. Also press release clearly states that:

      “There can be no assurance that the discussions with Pebblebrook will result in the consummation of a transaction”

      So considerable risks remain, but the spread has narrowed to 1.7% (using yesterday’s after hours LHO price). I think the remaining spread is not worth the risk, especially taking into account the rumors that higher offer from Blackstone is unlikely:

      https://www.wsj.com/articles/blackstone-doesnt-plan-to-raise-bid-for-hotel-owner-1536188780?mod=yahoo_hs&yptr=yahoo

  3. lngtrminvestor1

    Latest update from yesterday; BX has 4 days to revise their offer.

    • Under the terms of the Pebblebrook Proposal, Pebblebrook would acquire LaSalle in a transaction with consideration of 0.92 common shares of Pebblebrook per common share of LaSalle, with the option for LaSalle shareholders to elect to receive a fixed amount of $37.80 per share in cash up to a maximum of 30% in aggregate of the consideration, subject to pro ration.
    • The company delivered notice to Blackstone of the board’s determination and intention to effect a change of recommendation and terminate the Blackstone Merger agreement.
    • Under the terms of the Blackstone Merger Agreement, such notice commenced a four business day period, during which the board may not change its recommendation, LaSalle may not terminate the Blackstone Merger agreement, and Blackstone has the right to propose amendments to the terms of the Blackstone Merger agreement.

  4. dt

    I closed out at 1% spread remaining. I guess there is still a chance that rumors on Blackstone walking away are incorrect and that a higher bid will appear. Might re-enter again if the spread widens.

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