Ashford Hospitality Trust Proposes to Acquire FelCor Lodging Trust
February 21, 2017 3:11am
Combined company would result in the third-largest pure-play publicly traded lodging REIT by enterprise value
FelCor's Board of Directors has failed to meaningfully engage and provide necessary due diligence information; Ashford Hospitality Trust seeks to conduct constructive dialogue to further explore the significant value creating opportunity
FelCor shareholders would experience a dividend increase of over 138% in the combined company
DALLAS, Feb. 21, 2017 -- Ashford Hospitality Trust (NYSE: AHT) ("Ashford Trust" or the "Company"), a real estate investment trust focused on investing in the hospitality industry in upper upscale, full-service hotels, announced today that it has submitted a non-binding proposal to acquire FelCor Lodging Trust (NYSE: FCH) ("FelCor") for a total consideration of $9.27 per share, based on closing prices as of February 17, 2017. FelCor shareholders would receive a fixed exchange ratio of 1.192 shares of Ashford Trust, a total of 400,000 shares of Ashford Inc. (NYSE MKT: AINC), and a total of 100,000 warrants to purchase Ashford Inc. shares. This offer, based on Ashford Trust's written non-binding proposal to FelCor's Board of Directors on February 21, 2017, represents a substantial premium of 28% over FelCor's current stock price of $7.23 on February 17, 2017, a 23% premium to the 10-trading day volume weighted average price, and an 11% premium to FelCor's 52-week high closing stock price of $8.34 on December 14, 2016.
Ashford Trust believes that the proposed combination has compelling strategic, operational, and financial merit, presenting the shareholders of FelCor and Ashford Trust with a significant value creation opportunity. The combined company would be the second-largest pure-play publicly traded lodging REIT by room count and the third-largest by enterprise value.
Ashford Trust has attempted to conduct good faith discussions with FelCor since early October 2016. However, even with a fully-executed non-disclosure agreement in place, FelCor has failed to meaningfully engage and has refused to provide customary information, including historical property level financial information, hotel management contracts, franchise/license agreements, consolidated financial projections, and other documents on Ashford Trust's customary due diligence request list, which information would allow Ashford Trust to fully evaluate this significant opportunity to unlock value for shareholders of both companies. As a result, Ashford Trust, in consultation with its financial and legal advisors, has now decided to make the proposal public in order to inform FelCor's shareholders of its intent.
"The benefits of this proposal are compelling. We believe the combination would provide significant strategic and financial benefits to both sets of shareholders and create a clear path towards considerable long-term value creation far in excess of FelCor's standalone prospects. Ashford Trust has a proven, long-term track record of delivering substantial returns to shareholders through a wide variety of strategic initiatives, including transformative transactions, and we believe shareholders will view our proposal favorably. While it remains our strong desire to reach an agreement with FelCor on a friendly basis, we are fully committed to pursuing this transaction and are prepared to take all necessary steps to complete it, including nominating a slate of independent directors to ensure that FelCor appropriately considers our proposal," said Benjamin J. Ansell, Lead Director of Ashford Trust.
In a letter to FelCor's Board of Directors, Ashford Trust detailed the potential strategic and financial benefits of the proposed combination, including:
A copy of the letter delivered to FelCor's Board of Directors on February 21, 2017 is included below:
February 21, 2017
The Board of Directors: Mr. Christopher J. Hartung, Mr. Glenn A. Carlin, Mr. Thomas J. Corcoran, Jr., Mr. Robert F. Cotter, Ms. Patricia L. Gibson, Mr. Steven R. Goldman, Ms. Dana Hamilton, Mr. Charles A. Ledsinger, Mr. Robert H. Lutz, Jr. and Mr. Mark D. Rozells
FelCor Lodging Trust Incorporated
125 E. John Carpenter Freeway, Suite 1600
Irving, Texas 75062
Dear Members of the Board:
Over the past several months, we have engaged in discussions with you regarding a business combination of FelCor Lodging Trust Incorporated ("FelCor") and Ashford Hospitality Trust, Inc. ("Ashford", "AHT" or "We"). Ashford continues to believe that a transaction between Ashford and FelCor has compelling strategic, operational, and financial merit. A combination presents both FelCor and Ashford shareholders with a value creation opportunity and will additionally provide the shareholders of FelCor an immediate premium for their shares and a material increase in their dividend.
At this point, you have left us no choice other than to make our proposal public. We want your shareholders to understand our attractive proposal. We are not only making our proposal public, but also nominating seven (7) directors for election to FelCor's board due to your lack of responsiveness and willingness to engage with us seriously. The goal of these directors, if elected, will be to diligently work to maximize value for FelCor shareholders by evaluating all options, including engaging with Ashford in a more meaningful fashion regarding our proposal, in accordance with their fiduciary duties. We are confident that this highly qualified group of independent director nominees will be supported by your shareholders and will diligently work to maximize value for FelCor shareholders.
Since October 2016, Ashford Trust and/or its advisors have privately conducted more than twenty meetings, phone conversations, and written correspondence with FelCor and/or its advisors discussing the substance and merits of a combination. Even though we executed a mutual non-disclosure agreement on January 11, 2017, you have been unwilling to share usual and customary information with us, including historical property level financial statements and property management agreements. Notwithstanding, we enhanced our proposal in our February 2, 2017 letter to FelCor's Board of Directors, as requested, based on your feedback and our sincere and determined interest in consummating this value creating transaction. We were extremely disappointed by your response letter on February 8, 2017 in which you rejected our revised proposal in an unconstructive manner and attacked the seriousness and substance of our proposal. It was an absolute validation of what we believe to be your disregard to maximize value for your shareholders. Maximizing shareholder value is paramount for Ashford as evidenced by our significant long-term shareholder return outperformance. We asked you back in October not to extend your brand-managed property management agreements that we believe were set to expire in an effort to maximize value for your shareholders. Nevertheless, you subsequently announced that you extended those contracts, which we believe negatively impacted value for your shareholders. We are even more disappointed to learn that, despite a substantial value enhancing proposal on the table, you have decided to proceed and announce the hiring of a new chief executive officer and deprive your shareholders fair consideration of our proposal. We can only reasonably conclude from your actions that you are unwilling to engage in good faith discussions regarding a mutually beneficial transaction, and that your actions to date have been taken to merely provide the illusion of engagement if our proposal were ever to become public. Perhaps we should not be surprised by the actions of the FelCor Board which only seem to be self-serving, considering that the tenured members of FelCor's Board1 have served as directors for an average of more than ten years. It is our understanding that a transaction committee of your Board consisting of Mr. Carlin, Mr. Hartung, Mr. Ledsinger, and Mr. Rozells was formed to review our proposal and ultimately rejected it. This decision follows similar poor decisions you have made in your oversight of FelCor during your respective tenures as directors. The table below shows the total shareholder return ("TSR") for FelCor as compared to AHT and the Bloomberg Hotel REIT Index since each of the following directors joined the board2:
(Year Joined the Board)
FCH TSR vs.
FCH TSR vs. Bloomberg
Hotel REIT Index TSR
Mr. Ledsinger3 (Completion Date
of Ashford IPO – August 29, 2003)
Mr. Rozells (2008)
Mr. Carlin (2009)
Mr. Hartung (2010)
Source: Bloomberg as of 2/17/17
FelCor has delivered the worst total return for shareholders among lodging REIT peers over the past ten years, but the FelCor Board has not been held accountable for such performance and its poor track record of decision making. In light of the FelCor's Board's failure to appropriately consider our value-enhancing proposal, we believe that the time has come to take appropriate and reasonable steps intended to result in prompt and fair consideration of our proposal on behalf of FelCor shareholders.
As we had provided in our February 2, 2017 letter to FelCor's Board of Directors, the following are the key components of our proposal:
We are proposing a total consideration of $9.27 per each FelCor share, based on a closing price of AHT as of February 17, 2017 and comprised of the following per share amounts:
A fixed exchange ratio of 1.192 AHT shares per FelCor share, equivalent in the aggregate to an approximate 58% ownership in the combined company;
0.003 shares of Ashford Inc. ("Advisor" or "AINC"), equivalent in the aggregate of 400,000 shares and approximately 20% ownership in AINC; 4 and
0.001 warrants to purchase Ashford Inc. shares with a strike price of $100 per share and an expiration date that is five years from the transaction closing date, equivalent in the aggregate of 100,000 warrants.
We note that our previous total consideration of $9.31 per share has been reduced by $0.04 per share for incremental change of control costs that we would now incur as a result of appointing the new CEO. Despite the value leakage that your ill-advised action created, our purchase price represents a substantial 28% premium to the closing price of FelCor's stock on February 17, 2017, a 23% premium to the 10-trading day volume weighted average price, and an 11% premium to FelCor's 52-week high closing stock price of $8.34 on December 14, 2016.
Our offer not only provides a substantial premium to FelCor shareholders, but also provides the opportunity for FelCor shareholders to meaningfully participate in the upside of both AHT and Ashford Inc. shares resulting from the transaction. Furthermore, FelCor shareholders will receive a 138% increase in their quarterly dividend in the combined company.
Ashford Inc. believes there may be approximately $18 - $30 million of operational and G&A efficiencies from this combination of Ashford and FelCor and is willing to stand behind a significant portion of the projected long-term, sustainable operating and G&A improvements that we are forecasting by offering a one (1) year guarantee of up to $18 million (sustainable operational and G&A synergies), commencing six (6) months following the completion of the transaction. The actual payment of this guarantee, if needed, would come in the form of reduced advisory fees paid to the Advisor. In order to finalize the terms of this guarantee as well as validate our underwriting, we again seek your cooperation in providing us with access to customary data, including property level financial information. We believe the offer of this guarantee provides greater certainty over the operational improvements that the combined company will generate.
Finally, research has shown that higher common stock trading volume has led to higher valuation, all other variables held constant. The greater float attained by combining our companies could lead to multiple expansion to the lodging REIT peer average.
Corporate Governance Enhancements and Advisory Agreement Amendments
As part of our proposal, we will make the following corporate governance enhancements and advisory agreement amendments:
We believe the business and strategic logic of this combination is clear, and we are confident in our view that our proposed transaction will provide significant benefits and lead to long-term value creation for both companies' shareholders. In fact, we believe the substantial overlap between the shareholders of FelCor and Ashford will reinforce the benefit from the value-creating combination of our two companies and that such shareholders will be highly supportive of the transaction. There are many benefits of this combination for FelCor shareholders including:
We are confident that our proposal is economically and strategically compelling to your shareholders. We believe your shareholders are ready for and deserve a change. In the last ten years, FelCor's total return has been a negative 60%, resulting in value impairment of nearly $845 million, while management and the board have spent over $260 million in G&A expenses. During this time, we believe FelCor has made multiple inferior capital allocation decisions and strategy shifts. A sample of what we view to have been inferior decisions includes:
Now FelCor has hired a new chief executive officer to lead the company, forcing shareholders to again take the risk of furthering this Board's agenda rather than engage in a merger with Ashford and a management team that has materially outperformed FelCor. We believe your shareholders deserve to hear a better alternative. Our proposal provides a significant and immediate premium to the current FelCor share price as well as the substantial future upside in our combined company. Furthermore, we believe that our proposal has a unique competitive advantage for your shareholders over many cash proposals as we are able to utilize a structure as a REIT that allows us to leave the existing secured and unsecured notes in place. Therefore, we believe will avoid the need to pay a significant make whole premium to redeem these notes. We are also prepared to make any required change of control offer required by either of the indentures governing such notes. We are already far along in the process of securing financing commitments for this purpose so there will be no financing contingency in our binding contract. In fact, UBS Investment Bank has already indicated to us that it is highly confident that it can raise the required financing. We believe that cash buyers would be burdened by the significant make-whole provision required to redeem your bonds at the current time. It is our view that recent renewal of brand management contracts has impaired value and may lead to declining interest from other management companies. We also believe offers from other publicly-traded REITs are unlikely, given Ashford has the most similar assets and investment strategy to FelCor. Overall, we believe our proposal offers the best outcome for FelCor shareholders.
As we have communicated to you many times in the past, it was never our desire to make our proposal public without your support. However, you have left us with no choice. We have a duty to our shareholders to pursue value maximizing opportunities on their behalf and believe it is imperative that we continue to work towards effecting a combination. As you know, we have already acquired a 4.5% stake in FelCor, making us one of your largest shareholders. We along with our advisers, UBS Investment Bank and Cadwalader, Wickersham & Taft LLP, are prepared to engage immediately with FelCor and its advisors. Assuming ready access to management and detailed company information, we are fully prepared to conclude our due diligence review within 30 days, concurrently with the negotiation of a definitive merger agreement. We are also prepared to continue to provide due diligence information to FelCor. As we have indicated to you, and because the Board of FelCor has been unwilling to engage with us in good faith, we are nominating a slate of independent directors to ensure that FelCor appropriately considers our proposal. We have identified a highly competent, experienced and entirely independent slate of directors willing to run for election to the FelCor Board.
Our proposal contained in this letter is preliminary and non-binding, and does not create any legally enforceable obligation of AHT, our Advisor or FelCor unless and until a definitive agreement is signed, which would contain customary terms and conditions. Any final proposal is subject to the completion of a due diligence review, the final approval of our respective boards and the negotiation and execution of mutually acceptable definitive transaction agreements.
It is our hope that the members of the FelCor Board will carefully evaluate the financial and operational benefits of this now-public proposal and elect to engage in a constructive dialogue with us so that, together, we can expeditiously execute this very compelling and transformative strategic business combination.
Benjamin J. Ansell
Lead Independent Director
Ashford Hospitality Trust Inc
Mr. Jonathan H. Yellen
EVP, General Counsel
Ashford Hospitality Trust is a real estate investment trust (REIT) focused on investing opportunistically in the hospitality industry in upper upscale, full-service hotels.
Ashford has created an Ashford App for the hospitality REIT investor community. The Ashford App is available for free download at Apple's App Store and the Google Play Store by searching "Ashford."
1 Excludes the two newly appointed members in 2016 and two outgoing directors
2 Includes directors on the Transaction Committee
3 Mr. Ledsinger joined the FelCor Board in 1997
4 Ashford Inc. shares will be distributed from the shares currently owned by AHT
5 Based on closing prices as of 2/17/17
6 Liquidity, The Value of the Firm, and Corporate Finance - Amihud & Mendelson, 2008; The Value Impact of Stock Liquidity: An International Evidence - Huang, Wu, Yu and Zhang, 2013; Stock Market Liquidity and Firm Value - Fang, Noe and Tice, 2008; The Effects of Stock Liquidity on Firm Value and Corporate Governance: Endogeneity and the REIT Experiment - Cheung, Chung and Fung, 2015.
Tags: ashford hospitality trust,
felcor lodging trust,
mergers and acquistions
Contact: Media: Lex Suvanto
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