Extended Stay inks new investment deal with Centerbridge and Paulson

By Caroline Salls

Pittsburgh, April 16 - Extended Stay Inc. requested court approval of the bidding procedures for its proposed plan of reorganization investor auction, according to a Thursday filing with the U.S. Bankruptcy Court for the Southern District of New York.

The company said it signed a commitment letter and investment and standby purchase agreement with Starwood ESH, LLC on March 15 and subsequently terminated its previous agreement with Centerbridge Partners, LP and Paulson & Co. Inc.

Extended Stay said the Starwood agreements provided more value to its creditors and estates than the original Centerbridge/Paulson deals.

Specifically, the Starwood agreements provided for an investment of up to $905 million, which substantially exceeded the $450 million investment set forth in the Centerbridge/Paulson investment agreement.

The $905 million consisted of a $450 million equity investment, a $200 million rights offering that was fully backstopped by Starwood and up to $255.4 million to be made available to the holders of certificates secured by the company's $4.1 billion mortgage loan in classes B through H, to the extent that such certificate holders would prefer to receive cash in lieu of the equity offered under the Starwood agreements.

Extended Stay said the Starwood agreements also allowed the company to entertain higher and better offers to create "an even higher floor for competing bids."

However, if the Starwood transaction did not close, Extended Stay would have been required to pay it a $19.5 million commitment payment, as well as a cash election commitment fee to be paid if the transaction did not close in an amount equal to the sum of $5.11 million and 1% of the cash election commitment actually paid by Starwood.

In addition, Extended Stay would have been required to reimburse up to $10 million of Starwood's expenses.

New proposal

In response to the improved terms in the Starwood agreements, the Centerbridge/Paulson investors provided Extended Stay with a new offer and proposal letter on March 29 under which they offered to assume the obligations under the Starwood agreements but eliminate some of Starwood's required bid protections, as well as management and incentive fees.

To secure their obligations to proceed with the proposed transaction, the Centerbridge/Paulson investors posted a $150 million deposit.

The Centerbridge/Paulson commitment letter was intended to act as a backstop commitment to allow Extended Stay to proceed with "an organized, comprehensive and transparent process to once and for all obtain the highest or best deal for the debtors' estates and creditors, thus paving the way for confirmation of a Chapter 11 plan and an expeditious exit from chapter 11."

Therefore, the Centerbridge/Paulson proposal requires the company to conduct a formal auction process.

Extended Stay said it has terminated the Starwood agreement and entered into a new deal with Centerbridge and Paulson, which will form the basis of a plan of reorganization to be filed by April 23.

Bid procedures

Under the bid procedures, all proposals are due by 3 p.m. ET on May 17 and must include a $150 million deposit.

The company will select qualified bidders by May 25, and the auction will be held on May 27.

If no bids other than the Centerbridge/Paulson offer are received, the auction will not be held, and a hearing on approval of the proposal will be held on June 17.

If the revised plan related to the investment agreement is terminated because the company selects an alternate proposal, the winning bidder will be entitled to liquidation damages in the amount of 10% of the total enterprise value of the bid, as well as reimbursement of up to $10 million in expenses.

A hearing on the bid procedures is scheduled for April 22.

Extended Stay, a New York-based owner and operator of mid-priced extended stay hotels, filed for bankruptcy on June 15, 2009. Its Chapter 11 case number is 09-13764.

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