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SPOKANE, WA—Red Lion Hotels Corp. said Tuesday it has retained the investment-banking firm JMP Securities to assist the board of directors in evaluating its options for maximizing shareholder value. The move follows Monday’s unsolicited, non-binding offer by Columbia Pacific Opportunity Fund LP to acquire the company for $9.50 per share, which works out to $173 million.Red Lion says it is prepared to grant Columbia’s request for confidential access to nonpublic information concerning the company, but will do so on a non-exclusive basis, which means other interested buyers will have access to the same information. Deutsche Bank analyst David Loeb told clients Wednesday morning to hold onto their shares “until further details are released or the valuation gap to our $11 price target substantially narrows, given that we see potential value well in excess of $11 under certain circumstances.”The Red Lion chain includes 53 hotels located in nine states and one Canadian province, with 9,266 rooms and 441,640 sf of meeting space. The company also owns and operates an entertainment and event ticket distribution business. Columbia Pacific Opportunity Fund currently owns 2.3 million shares of Red Lion stock, or 12.7% of the company.

The offer by CPOF is a 35% premium to Friday’s closing share price of $7.01. In early afternoon trading Monday, shares of the company were trading at $8.15, up 15% on the day, and had traded as high as $8.66 earlier in the day. The company’s 52-week range is $6.45-$13.25. In afternoon trading Wednesday, shares were trading at $8.02, up $0.06 on the day.

In its offer letter, COPF principal Daniel R. Baty stated that COPF could accomplish its necessary due diligence review within 60 days. “We are prepared to proceed immediately with discussions and our due diligence review in anticipation of signing a definitive merger agreement upon the execution of a confidentiality agreement,” he states.

SEC filings show that private discussions between Columbia Pacific and the Red Lion board began in April but were broken off by Red Lion without agreement on a buy-out, according to Loeb. “As such, we expect this is likely just the beginning of the story,” he told clients Monday.

Given that Red Lion’s capital structure does not leave significant room for additional debt in a take-private, Loeb stated the buyout likely would require equity of approximately $175 million. Other potential buyers could include Carlson Hotels, Choice, Wyndham or, secondarily, Intercontinental or Global Hyatt.

Loeb believes Red Lion can create substantial shareholder value by increasing the geographic distribution of the brand through ownership, joint ventures, and franchising. “The brand’s regional size might be a bit of a work-in-progress before its value is maximized, which would be the board’s case should it reject the public offer,” he says. “The biggest challenge to the board will be balancing the historically low multiples seen in today’s public hotel markets with recent RLH share performance and the long-run value potential of the company.”Columbia Pacific Opportunity Fund LP includes Alexander B. Washburn, Daniel R. Baty, Stanley L. Baty and Brandon D. Baty. The principal business address of the Reporting Persons is 1910 Fairview Avenue East, Suite 500, Seattle, Washington 98102. Columbia Pacific Advisors LLC serves as the investment manager of Columbia Pacific Opportunity Fund. Washburn and the Batys serve as the managing members of the CPA and are primarily responsible for all investment decisions regarding each Fund’s investment portfolio.

Loeb says Columbia Pacific might only be interested in the real estate, not the company. “It’s possible Columbia Pacific sees RLH as a pure real estate play where it can sell the company’s real estate and entertainment business in a public to private arbitrage,” he says. “Our scenario analysis of this possibility suggests substantial upside to current levels, perhaps to $17 in liquidation, though the execution of this strategy is challenged in today’s financing environment.”

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