Extended Stay To Be Plucked From Bankruptcy by $905M Trio of Investors
- Mar 23, 2010
March 23, 2010
By Barbra Murray, Contributing Editor
Nine months after having filed for Chapter 11 bankruptcy protection, Spartanburg, S.C.-based Extended Stay Hotels Inc. has accepted an offer that will solve its financial woes. Starwood Capital Group, TPG Capital and Five Mile Capital Partners have agreed to recapitalize the company to the tune of $905 million, thereby allowing for its emergence from bankruptcy.
The Lightstone Group, spearheaded by David Lichtenstein, acquired Extended Stay in June 2007 from The Blackstone Group for $8 billion, relying on $7.4 billion in mortgage and mezzanine loans to finance the majority of the purchase. At the time, the portfolio encompassed 684 mid-price extended-stay lodging properties accounting for 76,000 guestrooms in 44 states and Canada.
But timing is everything and, as it turns out, the timing of the transaction was all wrong. Soon after the gargantuan acquisition closed, the economy took a nosedive and the credit markets froze, leaving Extended Stay with lower property revenues and few options for restructuring its debt. Today, the hotel chain’s debt still stands at $7.4 billion.
As per the agreement with Starwood, TPG and Five Mile, the investor triumvirate will infuse Extended Stay with $450 million of equity, backstop a $200 million equity rights offering, and set aside $255 million in cash to provide creditors with the option of receiving cash instead of equity. The deal calls for Starwood to supply about 50 percent of the new equity, and TPG and Five Mile to cover the remaining commitment. If all goes as planned, the transaction–which would leave Extended Stay’s with a value of $3.9 billion–will reduce the company’s debt to $2.8 billion after the its reorganization. Before the transaction can move forward, the US Bankruptcy Court, Southern District of New York, must give the green light.
Extended Stay came close to escaping its financial problems via a different offer earlier this year. In February, Centerbridge Partners L.L.P. and Paulson & Co. Inc. proposed a deal in which they would buy the hotel chain for $225 million and backstop a $225 million equity rights offering for a total investment of $450 million. Extended Stay agreed to the transaction, but reserved the right to consider other options. And so it did. The Centerbridge and Paulson agreement has been terminated in favor of the offer from the trio.