- Greatly enhanced portfolio quality, with comparable RevPAR increasing nearly 4% to $182 and EBITDA margin increasing 60 basis points to 29.7%
- Provides immediate brand, operator and geographic diversification
- Acquiring high-quality portfolio at attractive pricing
- Pro forma leverage to remain comfortably within target range of 3-5x net debt to Adjusted EBITDA
Park Hotels & Resorts Inc. (NYSE: PK) and Chesapeake Lodging Trust (NYSE: CHSP) today announced that they have entered into a definitive merger agreement under which Park will acquire all the outstanding shares of Chesapeake in a cash and stock transaction valued at approximately $2.7 billion (inclusive of transaction costs). Upon completion of the merger, the combined company will have an estimated enterprise value of $12 billion, firmly solidifying Parks position as the second largest lodging REIT while also advancing the Companys strategic goals of portfolio enhancement and diversification. The transaction has been approved by the board of directors and board of trustees of Park and Chesapeake, respectively.
Under the terms of the merger agreement, Chesapeake shareholders will receive $11.00 in cash and 0.628 of a share of Park common stock for each Chesapeake share. The fixed exchange ratio represents an agreed upon price of $31.00 per share of Chesapeake shares of beneficial interest based on Parks trailing 10-day volume weighted average price (VWAP) as of May 3, 2019. Based on Parks closing stock price on May 3, 2019, this represents $31.71 per share of aggregate value to Chesapeake shareholders and represents a premium of approximately 11% to Chesapeakes trailing 10-day VWAP and approximately 8% to Chesapeakes closing stock price on May 3, 2019. Upon closing, Park stockholders and Chesapeake shareholders will own approximately 84% and 16% of the combined Company, respectively. The transaction is subject to customary closing conditions, including receipt of the approval of Chesapeake shareholders. The companies currently expect the transaction to close in late third quarter or early fourth quarter of 2019.
We are thrilled to strategically combine our two companies in a compelling transaction that is accretive for stockholders, said Thomas J. Baltimore, Jr., Chairman and CEO of Park. Chesapeakes high-quality portfolio of hotels will accelerate our strategic goals of upgrading the quality of our portfolio and achieving brand, operator and geographic diversity. This merger provides Park and its stockholders with identifiable synergies and opportunities to drive incremental growth through Parks proven asset management capabilities. In short, we are expecting to have the same record of success and growth from the Chesapeake assets that we have enjoyed from the Hilton assets we took over in January 2017 and we will be laser focused every day to create long-term value.
This merger will be a transformative event for the shareholders of both companies, said Thomas Natelli, Chairman of the Chesapeake Board of Trustees. We believe the combined company will create a superior platform for delivering exceptional returns to Chesapeakes existing shareholders, by improving diversification, increasing scale, lowering cost of capital and benefitting from combined synergies. Chesapeakes management team, under the leadership of CEO Jim Francis, has built a fantastic portfolio of hotels in major markets and has consistently delivered excellent results. We are confident that Parks leadership team will continue this trajectory with the addition of our portfolio of leading hotels, which will translate into increased value for all stakeholders.
Leadership and Organization
Each of the Board of Directors of Park and Board of Trustees of Chesapeake has approved the merger. Parks Board of Directors will be increased to ten members upon closing, with two additions from Chesapeakes Board of Trustees. Thomas J. Baltimore, Jr., Parks Chairman and CEO, will continue to serve as Chairman of Parks Board of Directors, and Mr. Baltimore will also continue to lead the combined company, along with Parks existing senior management team.
Non-Core Asset Sales
Park plans to sell five non-core hotels prior to the proposed closing, including both of Chesapeakes New York City hotels (the 122-room Hyatt Herald Square New York and the 185-room Hyatt Place New York Midtown South), in addition to three non-core Park hotels which are currently under contract. On a pro forma basis that accounts for these sales, the combined company would consist of 66 high-quality hotels located in key urban and resort markets in 17 states and the District of Columbia.
The combined company expects to implement Parks proven asset management initiatives to create incremental value across Chesapeakes existing portfolio through already-identified opportunities. Those initiatives include remixing the demand mix by increasing Chesapeakes group segmentation and replacing lower-rated contract business, enhancing food and beverage profitability, driving ancillary income, and sourcing additional cost savings. Overall, Park has identified approximately $24 million of potential EBITDA upside in 2020 and approximately $34 million of potential EBITDA upside in 2021 across Chesapeakes portfolio, including approximately $17 million of annual G&A savings. Over time, we expect additional value creation will be driven by select ROI projects, potentially including the repurposing of underutilized space as meeting space expansions, adding additional keys, energy efficiency projects and brand repositionings at select properties. Please refer to the investor presentation on Parks website for additional detail regarding the identified synergies and opportunities for the combined company.
The combined company also expects to benefit from enhanced scale in markets in which both companies currently have a presence, such as San Francisco, and from diversification of brand, operators and geography, which translates into the identification and implementation of best practices across the portfolio.
BofA Merrill Lynch and Barclays are acting as financial advisors and Hogan Lovells is acting as legal counsel to Park. J.P. Morgan Securities LLC is acting as exclusive financial advisor and Paul, Weiss, Rifkind, Wharton & Garrison LLP and Polsinelli PC are acting as legal counsel to Chesapeake.
Park has secured a $1.1 billion financing commitment from BofA Merrill Lynch to finance the cash component of the merger consideration, repay Chesapeakes unsecured term loan and two mortgages and pay for a portion of the transaction costs. Net debt to Adjusted EBITDA pro-forma for the transaction increases to 4.6x, however, when accounting for the five hotels we anticipate selling prior to closing, pro-forma net debt to Adjusted EBITDA falls to 4.4x, each of which are well within our stated range of 3x to 5x.
About Park Hotels & Resorts
Park Hotels & Resorts Inc. (NYSE: PK) is the second largest publicly traded lodging real estate investment trust with a diverse portfolio of market-leading hotels and resorts with significant underlying real estate value. Parks portfolio currently consists of 51 premium-branded hotels and resorts with over 30,000 rooms located in prime U.S. markets with high barriers to entry.
About Chesapeake Lodging Trust
Chesapeake Lodging Trust is a self-advised lodging real estate investment trust (REIT) focused on investments primarily in upper-upscale hotels in major business and convention markets and, on a selective basis, premium select-service hotels in urban settings or unique locations in the United States. The Trust owns 20 hotels with an aggregate of 6,288 rooms in eight states and the District of Columbia.
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