FelCor Tests Water, Nips Plan to Sell

Thomas J. Corcoran Jr., now chairman of the FelCor board, and the locally based REIT's top executives aren't commenting about the shop talk. But, sources confirm the top window shoppers were Highgate Holdings Inc., a private investment firm based in Dallas, and New York City-headquartered giants, Lehman Brothers Inc. and Whitehall Goldman Sachs.

One industry source believes FelCor's plan hit a roadblock because the vast majority of the 113-hotel portfolio, with an estimated 33,000 keys, is encumbered--both in management pacts and brand agreements. Another insider says FelCor just couldn't hit the right numbers. Analysts' best guesses are the portfolio would need to draw $23 per share to $25 per share to get the board's attention. The REIT calculates its current market cap at nearly $3.3 billion.

"I don't think they had the da Vinci Code to crack it," the one insider says.

Analysts and sources alike agree the REIT gained new footing in a late January agreement with London-based InterContinental Hotels Group plc after a year of talks to rework a management pact so it could cut loose another 38 hotels. In fact, the InterContinental agreement is viewed by market watchers as the pivotal point in Corcoran's decision to turn over reins as president and CEO to his long-time sidekick, Richard A. Smith--and the precipitating factor to test the waters for a sale.

"InterContinental made it saleable," one analyst says, "but it also made a better climate for them going forward. They should be in a better position to invest and can go ahead and make some acquisitions. The board was reluctant in the past."

Another analyst concurred gains clearly were made with the reworked management pact, but pointed out "it still required a buyer interested in a significant amount of real estate at that price point." His best guess: $23 per share.

FelCor has recovered from the 9-11 slump by selling non-core assets, repackaging interest rates and reducing exposure in concentrated markets like Texas. "To Tom's credit, he wrote it off to the cycle. He brought down the cost of debt and got rid of older assets," an analyst says. "The crowning achievement was the negotiations with InterContinental to restructure the management agreement which was kind of albatross around the company. I think the InterContinental agreement was the reason Tom felt he could step aside. The company was well positioned going forward."

FelCor, marking its 10th anniversary as a publicly traded company, is poised to ring the NYSE's closing bell June 6, sending a signal that its "repositioning program is well underway and continues to be a success," according to the announcement about the coveted event. When the market closed yesterday, FelCor stock was $21.38 per share, up 0.57 points for the day. The trading volume was 432,400 shares while its outstanding stock count is roughly 60.89 million. An SEC look shows an abnormal amount of trading in the past two months, but it could be due to the REIT's new market highs. The high-water mark was set May 5 at $22.89 per share, $9.62 higher than its low point recorded Oct. 12, 2005.

The FelCor team, like the rest of the industry's dealmakers, is heading to the 28th annual New York University International Hospitality Industry Investment Conference, which opens Sunday in the Marriott Marquis Times Square at 1535 Broadway in New York City. Whether it's a twist of fate or planned, Corcoran's scheduled to be on a panel about whether the pendulum is swinging back to the brands and a roundtable discussion about management and franchising agreements.

FelCor is the industry's largest owner of Embassy Suites Hotels and Doubletree Guest Suites. Its other flags are Hilton, Sheraton, Westin and Holiday Inn. But Corcoran's long-time favorite subject is the Embassy brand. "Now the question is," one seasoned industry pro ventures, "is what's the premium going to be and what's it going to take for shareholders."

FelCor tested the waters without a book. But then, Dallas-based Wyndham International Inc. and La Quinta Corp. along with MeriStar Hospitality Corp. of Bethesda, MD did the same, with New York City power player, Blackstone Group scoring the triple win. The handful of polled insiders say FelCor doesn't hit Blackstone's sweet spot. In fact, word from the front is Blackstone is casing Europe for acquisitions after filling its pouch with US properties.

On the other hand, another seasoned industry pro cautions not to place bets that a FelCor match won't be found at NYU's two-day conference, where nearly 2,000 movers and shakers are lined up to attend. "These things will be talked about," he stresses. "It's all a money game. And, everything is for sale, of course."