Patriot American to Buy Interstate Hotels for $2.1 Billion
Patriot American Hospitality Inc. agreed to buy Interstate Hotels Corp. for $2.1 billion in cash, stock and assumed debt, gaining upscale hotels to help build up its Wyndham brand as a flagship.
The real estate investment trust will pay $37.50 a share in cash and stock and take on $785 million in debt. Interstate, with 45,000 rooms in 222 hotels and resorts, is the U.S.’ largest independent hotel operator.
The purchase, expected to close in late February or March, would be the biggest yet in Chairman Paul Nussbaum’s $5-billion buying spree that will give Patriot 455 hotels, up from 45 just a year ago. Now, the company will focus on expanding the Wyndham chain, which it is acquiring in a separate purchase.
“They’re growing a brand here, and it will start to bear fruit in the next 24 months,” said Paul Keung, an analyst at Deutsche Morgan Grenfell who rates Patriot a “buy.”
Pittsburgh-based Interstate’s shares fell 81 cents to close at $35.94 on the New York Stock Exchange. The stock had jumped 17% in the last month on takeover speculation. Dallas-based Patriot’s shares fell 75 cents to $30.81, also on the NYSE.
The purchase plan is the latest in a record year for the hotel industry. About $43 billion in acquisitions have been announced this year, said Arthur Adler, a partner at Coopers & Lybrand’s lodging and gaming group. That eclipses the $8.8 billion in completed sales last year.
The buying has been sparked by REITs, which can shelter some income from taxes if they pay out 95% of net income as a dividend.
Patriot is one of four REITs that can also operate other businesses, such as hotels. That allows their shares to trade at a higher multiple to cash flow, giving them a strong currency for acquisitions.
Patriot plans to pay cash for 40% of Interstate’s outstanding shares and exchange its stock tax-free for the remaining 60%.
All of Patriot’s purchases would give the company 455 hotels with about 103,000 rooms that it owns, leases, manages or franchises.
The centerpiece of its plan is Wyndham Hotel Corp., which it expects to acquire in the next month or so for $1.1 billion. Patriot said it made a tentative deal with Marriott International Inc. to convert 10 Marriott-brand hotels acquired with Interstate to the Wyndham name.
Interstate also owns 40 mostly upscale hotels. About half could be converted to the Wyndham brand.