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Park Hotels to buy Chesapeake Lodging in US$2.7b deal

New York

PARK Hotels & Resorts has agreed to acquire Chesapeake Lodging Trust in a cash-and-stock deal valued at US$2.7 billion, helping Park to secure its position as the second-largest lodging real estate investment trust.

Chesapeake shareholders will get US$11 in cash and 0.628 of a share of a Park common stock for each of their shares, for an aggregate value of US$31.71 a share, the companies said in a statement on Monday.

That represents an 8.2 per cent premium to Chesapeake's closing price last Friday.

"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," said Park Hotels' chief executive officer Thomas Baltimore in the statement.

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Park Hotels was spun out of Hilton Worldwide Holdings in 2017 and has been seeking to diversify its portfolio, which consists of 51 properties, all Hilton brands. Chesapeake has 20 properties, including the JW Marriott San Francisco Union Square and the Royal Palm South Beach Miami.

Five hotels will be sold prior to the acquisition's completion, including both of Chesapeake's New York City hotels, the Hyatt Herald Square New York and the Hyatt Place New York Midtown South.

That would leave the combined company with 66 hotels in urban and resort markets across 17 US states and the District of Columbia.

The deal is expected to close in the second half of this year. Chesapeake will pay a breakup fee of US$38.5 million if it terminates the deal in favour of a superior proposal prior to June 4. The breakup fee rises to US$62.5 million thereafter.

Baltimore, who has talked up the benefits of hotel-industry mergers in the past, found a willing seller in Chesapeake CEO James Francis, who signalled his readiness to sell properties during a February earnings call.

"We are certainly kicking around the idea of a couple of asset sales because, from our perspective, right or wrong, but we think we're right, it's relatively attractive pricing out there to sell assets into," Mr Francis said at the time.

Park, which said it secured a US$1.1 billion commitment from Bank of America to finance the cash portion of the purchase, expects the acquisition to increase adjusted funds from operations per share by 2 per cent in 2020 and at least 3 per cent in 2021.

Those projections include expected cost savings of US$24 million in 2020 and US$34 million in 2021.

Now that Chesapeake is in play, private equity firms could seek to use their lower cost of capital to come up with a competing offer, Michael Bellisario, an analyst at at Robert W Baird & Co, wrote in a note on Monday.

That suggestion recalls Pebblebrook Hotel Trust's acquisition of LaSalle Hotel Properties last year, in which Pebblebrook had to fend off a rival offer from Blackstone Group.

"We don't see a repeat of that drama," Park Hotels' Mr Baltimore said during a conference call. "We want to stay as far away from that as possible." BLOOMBERG

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