Investment giants Blackstone and Starwood Capital are making a $6 billion bet that the travel and hospitality industry can bounce back following the Covid-19 pandemic.
The pair are joining forces to buy Extended Stay America for $19.50 per share, a 15.1% premium on last week’s closing price.
Blackstone is no stranger to Extended Stay America, having bought the company in 2004 for $3.1 billion before selling it three years later for $8 billion. It was then a member of a consortium that acquired it out of bankruptcy in 2010, beating a rival bid involving Starwood.
“Extended Stay has demonstrated resilience over the past year despite persistent challenges due to government lockdowns and travel restrictions. We are excited about the Company’s growth opportunity as restrictions ease and we’re confident that, in partnership with Blackstone and the Company, our team has the right experience to drive continued success,” Barry Sternlicht, CEO of Starwood Capital, said.
In a year that has seen hotels across the world shut their doors for extended periods, Extended Stay’s share price has more than doubled. The company had an occupancy rate of 74 percent in 2020, higher than many of its hospitality rivals, thanks to its ability to attract essential workers.
“Travel and leisure is one of Blackstone’s highest conviction investment themes, and we have confidence in the extended stay model. We helped create this company nearly twenty years ago, and believe our expertise puts us in a unique position to add long-term value,” Tyler Henritze, head of US acquisitions for Blackstone Real Estate, said.
Deals, deals, deals
The acquisition of extended Stay is the latest in a string of deals across the hotel industry, as buyers look to take advantage of a return to something like normality in the travel industry.
Las Vegas Sands is selling the Venetian and Sands Expo Center for $6.25 Billion. Elsewhere, Private members' club Soho House and Rosewood Hotel group are also reportedly planning to go public.
So what should we deduce from most recent piece of M&A activity? Well, a large part of it might be to do with the specifics of the Extended Stay business, which skews heavily on the property ownership scale. Perhaps the new owners are thinking about spinning off ESH Hospitality, Inc, its REIT subsidiary? Blackstone and to a lesser extent Starwood are very familiar with the business, which could also have something to do with the deal.
“It is in a sweet spot for travel, being comfortably the most resilient sector and a potential beneficiary from the nomadic traveller and a US infrastructure boom,” Richard Clark, a senior analyst covering the global hospitality and leisure industry at Bernstein, said.
In contrast to many other listed hotel company’s, Extended Stay America is focused on one market: North America. This puts it in a good position when things start to unlock in the United States and Canada with domestic travel and tourism expected to play a big part in any recovery.
“It shows the appeal of the resilient domestic economy hotel assets, potentially also those backed by property portfolios. Economy hotels have recovered more quickly than the market in previous cycles, and investors see their guest demand as less vulnerable to the risks of video calling replacing aspects of corporate travel,” Leo Carrington, head of European travel and leisure research at Credit Suisse , said.
Insight: At $6 billion, the deal for Extended Stay America is certainly a blockbuster, though not entirely unexpected given its business model and buyers. The economy sector is especially resilient and Starwood and Blackstone will be hopeful that those impressive occupancy levels can be turned into higher room rates.
Economic shocks like the coronavirus pandemic always lead to more M&A deals. The question is who’s next? Could we see some combination at the top end, like Marriott and Starwood, and what about Whitbread with its substantial property empire?