Blackstone Buy Primes Buyers For Midprice Hotel Fight

The Blackstone Group, a private investment and advisory firm, last month said it would buy Prime Hospitality, whose brands include midprice AmeriSuites and Wellesley Inns & Suites.

The deal is the latest in a series of transactions in the midprice and extended stay categories. InterContinental Hotels Group bought the Candlewood Suites extended stay brand last winter and La Quinta Corp. in July acquired midprice Baymont Inns & Suites. The Prime acquisition is the third for Blackstone in the past 18 months, following the acquisitions of Extended Stay America in May and a second brand, Homestead Studio Suites, earlier.

For buyers who bring significant volume to midprice chains, the continuing consolidation signals less competition and, therefore, less overall negotiating leverage. Much depends, however, on the markets involved. Much midprice inventory is concentrated in suburban and highway locations. Depending on the particular market, therefore, lack of competition may not be an issue.

This pace of consolidation is consistent with projections for 2004 across all price points issued by PricewaterhouseCoopers. "We estimate that there will be five to 10 major mergers and acquisitions this year, the highest number since 1999," said Bjorn Hanson, global leader of the firm's hospitality and leisure practice. "Companies have been deferring transactions, awaiting more receptive equity markets, while the equity markets and institutional investors have been awaiting signs of accelerating industry performance. All the requirements for merger and acquisition activity now are emerging."

Brands in the midprice segment, especially the crowded midprice without food and beverage category, were ripe for acquisition since they performed relatively well in terms of both occupancy and revenue growth during the recent industry downturn.

These chains benefited from the trend of trading down, in which many buyers, facing pressure to achieve cost savings, moved from full-service hotels to alternative midprice properties.

Prime chairman and CEO Attilio Petrocelli said following the deal, which is valued at $790 million and subject to shareholder approval, 37 of the 80 Wellesley Inns & Suites would be converted to one of Extended Stay America's three brands. Selected for conversion would be properties that feature rooms with kitchens and other residential amenities favored by extended stay travelers. As of Sept. 1, there were 146 AmeriSuites properties.

Prime last year launched a new full-service brand, Prime Hotels & Resorts, but there are only 15 such properties. As Blackstone has increased its commitment to the midprice and extended stay tiers, it has significantly cut back its exposure in the full-service sector. For example, this year it sold the London-based Savoy Group of deluxe hotels to an Ireland-based investment group. Last month, it sold the Watergate Hotel in Washington, D.C.

A Blackstone spokesperson declined to comment on any of the firm's plans for Prime, since the deal has not yet closed. Following the Homestead and Extended Stay America acquisitions, Blackstone said it would retain each of the brands as a separate entity, but consolidate the management in Extended Stay America's headquarters in Spartanburg, S.C. A number of key Extended Stay America executives have since left the chain.