The latest example of how quickly times change? Extended Stay Inc.
When private real estate company Lightstone Group LLC announced in April 2007 it would purchase the hotel company for some $8 billion from Blackstone Group LP (NYSE:BX), Lightstone chairman and CEO David Lichtenstein was eager to talk about the deal.
Lichtenstein told The Deal that Citigroup Private Bank sold him on the transaction in a bit of synergistic dealmaking. The Citigroup Inc. (NYSE:C) branch set up a meeting between Lichtenstein, a customer of the private bank, and its real estate investment bank, where Lichtenstein saw an Extended Stay proposal. He then hired Citi as financial adviser.
"Citibank came up with an idea, and poof, it was a fabulous dish," Lichtenstein said.
And now? Extended Stay, which says it is the largest owner and operator of midprice extended stay hotels in the U.S., filed for Chapter 11 on Monday in the U.S. Bankruptcy Court for the Southern District of New York. The company cited a liquidity crisis caused by reduced consumer spending and high gas prices -- which lowered occupancy rates and revenue -- and the collapse of the financial markets and constriction of credit. The value of Extended Stay's properties has decreased with the downfall of the real estate market, with a further hit coming from the debtor's inability to invest in property upgrades.
Extended Stay thus finds itself in the same situation as many companies purchased in the last M&A wave: burdened with too much debt. The deal included some $4.1 billion in mortgage debt and $3.3 billion in 10 mezzanine loan tranches, which the debtor can no longer service. A proposed restructuring would wipe out current holders of common equity and hand all new shares to the mortgage lenders (which would also get $2.575 billion in new loans plus up to $471.25 million in preferred shares); current preferred equity holders would get warrants for 10% of new common shares as well as certain call options.
While it's unclear from court documents exactly what Lightstone's stake is in Extended Stay -- The Wall Street Journal cited sources saying the firm put in $200 million in equity, some of which was borrowed -- Lichtenstein may wish he never heard from Citi. - David Elman
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