CNL Hospitality Buys RFS in $687M Deal

A wholly owned subsidiary of CNL Hospitality will pay RFS $383 million in cash ($12.35 per share) and assume total debt of $304.6 million. The deal is the largest in the history of fast-rising, five-year-old CNL Hospitality and will make the firm the fifth largest hospitality REIT in the United States, based on assets and number of hotels, Hutchison says.

"This transaction enables us, in one step, to further our position as one of the nation's largest and most diversified lodging REITs, with a presence in all regions of the country; an attractive mix of hotels in urban centers and resort destinations; as well as strong relationships with the industry's leading operating brands," says Hutchison.

When the deal is done, CNL will have an estimated 24,271 rooms at 120 hotels in 47 states. Leading brands under which RFS hotels operate include Sheraton, Residence Inn by Marriott, Hilton, Doubletree, Holiday Inn, Hampton Inn, Homewood Suites by Hilton and TownePlace Suites by Marriott.

The transaction has been approved by each company's board of directors. Further approval is needed from RFS shareholders and limited partners, certain regulatory approvals and other customary closing conditions. The deal is not contingent on CNL obtaining financing.

An affiliate of Bank of America is funding a large portion of the purchase price on a secured basis. The bank will use the available secured debt capacity under the terms of RFS's 9.75% senior notes due 2012.

Since the acquisition will mean a change of control, CNL will be required to repurchase the senior notes at 101% of principal value, plus accrued and unpaid interest. Separately, CNL will purchase directly from RFS one million newly issued shares of RFS common stock at $12.35 per share.

Flagstone Hospitality Management LLC, a wholly owned subsidiary of Washington, DC-based Interstate Hotels and Resorts Inc., will continue to manage the majority of hotels in the RFS hotel portfolio following closing.

Like Hutchison, John Griswold, president of CNL Hospitality, also views the transaction as a strategic move, based on the industry's current health.

"With relatively little additional supply expected in the next several years and stabilizing demand, we believe that the long-term outlook for the industry remains favorable," Griswold says. "Both companies have shown that they can deliver consistent returns through market cycles."

Robert Solmson, chairman and CEO of RFS, likes the numbers in the deal. "We believe that all-cash consideration for RFS from one of the nation's largest lodging REITs is clearly in the best interests of our shareholders and, in the opinion of both the RFS board of director and its management team, represents a price which fairly reflects the value of the company," Solmson says.

Hutchison, likewise, says CNL shareholders are getting a good deal. "The RFS portfolio brings CNL and our investors strong, dependable cash flow, enhanced scale and brand, and geographic diversification," he says.