Blackstone Sleeps Easy With MeriStar –

Given its activities over the past year and a half, The Blackstone Group is certainly not in the lodging industry for a short-term stay. Late last month, the New York-based firm agreed to acquire MeriStar Hospitality Corp., a real estate investment trust (REIT) focused on the hotel sector, for about $2.6 billion. The announcement of this transaction represents Blackstone’s seventh hotel deal since mid-2004, and is the firm’s second transaction agreement with MeriStar in a period three weeks.

The acquisition, expected to close in the second quarter, breaks down with Blackstone paying $10.45 per MeriStar (NYSE:MHX) share, a 20% premium to the share price on Nov. 10, 2005, when rumors of the takeover first hit the press. In the few months since then, MeriStar share prices have remained somewhat buoyed and-as of press time-were trading at $10.32, reducing the premium to about 1.25 percent.

Bethesda, Md.-based MeriStar owns 57 principally upscale, full-service hotels in 19 states and the District of Columbia under the Hilton, Sheraton, Marriott, Ritz-Carlton, Westin, Doubletree and Radisson brand names.

“MeriStar should benefit from a favorable macro environment over the next several years, as demand continues to rebound against a backdrop of historically low supply growth,” said Citigroup Analyst Michael Rietbrock. He added that MeriStar’s hotel ownership model has a high degree of operating leverage, and profit margins are significantly below peak levels, “Which suggests good long-term growth potential.”

On the other hand, Rietbrock noted, the lodging space contains a sizable risk as changes in hotel demand have been highly correlated with the ebbs and flows of the gross domestic product. “The U.S. lodging industry generates 65% of its demand from corporate travelers and 35% from leisure quests,” he says, adding, “Slower-than-expected economic growth or corporate profitability could affect financial results at MeriStar.”

Both Blackstone and MeriStar declined to comment on the transaction. A MeriStar spokeswoman cited a “quiet period” that would end once the proxy is released, expected sometime this week.

If completed at its current terms, the MeriStar transaction will fall in the middle of the road-in terms of purchase price-compared to Blackstone’s other recent hotel acquisitions. The deal comes in below the $3.4 billion, $3.24 billion, and $3.1 billion acquisitions of La Quinta Corp., Wyndham International and Extended Stay America, and above the $1.23 billion and $790 million buyouts of Boca Resorts Inc. and Prime Hospitality Corp.

On Feb. 1, Blackstone announced that it agreed to acquire nine hotels and a golf and tennis club, all located in Florida, from MeriStar for approximately $367 million. That transaction, which remains separate from Blackstone’s agreement to acquire the remainder of MeriStar, is expected to close sometime before April.

Blackstone’s real estate group is currently investing from its Blackstone Real Estate Partners IV LP, which raised $2.05 billion in 2003. Acquisition financing will be provided by Bear Stearns, Bank of America and Merrill Lynch. Lehman Brothers served as MeriStar’s financial advisor and ran the sales process for the company. Completion of the transaction is not subject to receipt of financing by Blackstone.