CapStar, American General to merge $530 million deal will create MeriStar, 3rd largest hotel REIT


March 17, 1998|By BLOOMBERG NEWS

WASHINGTON -- CapStar Hotel Co. and American General Hospitality Corp. announced yesterday that they will merge in a transaction valued at about $530 million, marrying two fast-growing companies with upscale hotels in big cities such as Los Angeles and Dallas.

Before the merger, CapStar will spin off its business that operates hotels. Though the shares of the REIT and the spun-off hotel management company will trade separately, the pair will work in tandem and have common boards. The REIT will own 110 hotels with brands such as Hilton, Westin and Sheraton.

The moves are aimed at helping the combined company be more competitive in making acquisitions. The tax advantage of being a REIT and its bigger size will allow it to pay more for hotels and still have them add to earnings -- benefits that may spur other firms to adopt a similar structure.

"There are a range of incentives that align both management teams to work together to manage the properties," said Jacques Brand, managing director of the lodging and hospitality group at investment bank BT Alex Brown.

The combined company, MeriStar Hospitality Corp., will be the third-largest hotel REIT, with a market capitalization of about $3 billion. Working with the operating company, MeriStar Hotels & Resorts Inc., it will create the first hotel company to operate as "paper-clip" REIT.

That structure should help it emulate the two largest hotel REITs: Starwood Hotels & Resorts and Patriot American Hospitality Inc. Both are called "stapled" or "paired-share" REITs, because their separate real estate and hotel companies trade as a single stock.

CapStar shares fell $1.50 to $34.25. Some investors had speculated that CapStar was going to be acquired and paid a premium, said CIBC Oppenheimer analyst Bailey Dalton, who rates CapStar shares a "buy." Also, some investors sold because they don't understand the paper-clip structure, she said.

Dallas-based American General rose 12.5 cents to $27.625.

Washington-based CapStar will first spin off its hotel operating business to shareholders, with the value of those shares estimated at about $3.

CapStar and American General will then combine. CapStar shareholders will get one share in the new company for each share they hold while American General holders will get 0.8475 ++ share.

MeriStar will also buy two closely held companies affiliated with American General -- American General Hospitality Inc. and AGH Leasing LP -- for $95 million in cash and securities. The two companies together operate 46 hotels owned by American General Hospitality and 15 hotels belonging to other owners.

As a REIT, the company will be able to shield most income from taxes so long as it pays out 95 percent of its earnings as dividends.

CapStar and American General have focused on acquiring upscale hotels in big cities and resort destinations, where it's generally cheaper to buy than to build new properties.

CapStar and American General made more than $1 billion in acquisitions in 1997. The combined company is likely to grow even larger, said CapStar Chairman Paul Whetsell.

MeriStar will be one of the biggest independent management companies, with 27,739 hotel rooms in 30 states and Canada. CapStar owns 56 hotels with 14,938 rooms and manages or leases 85 properties with 13,304 rooms. American General will own 66 hotels when pending acquisitions close.

Pub Date: 3/17/98

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