It looks like Royal Host's low offer is shriveling.
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newswire.ca
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CHIP REIT trustees recommend rejection of Royal Host offer
VANCOUVER, June 10 /CNW/ - Canadian Hotel Income Properties
Real Estate Investment Trust
HOT.un
Canadian Hotel Income Properties Real Estate Investment Trust (''CHIP
REIT'') today recommended that CHIP REIT unitholders reject the offer from
Royal Host REIT for all the units of CHIP REIT. This recommendation is
supported by the opinion of TD Securities Inc., the financial advisor to CHIP
REIT's Special Committee of Trustees, that the offer is inadequate from a
financial point of view.
''We urge CHIP REIT unitholders not to tender their units to this
offer,'' said Rhys Eyton, Chairman, President and CEO of CHIP REIT. ''The
offer provides no discernible value to CHIP REIT unitholders. It results in a
financially weaker entity that would increase our unitholders' exposure to the
less attractive limited-service hotel segment.''
In making their recommendation, the Trustees considered all aspects of
the offer and identified a number of factors indicating that the offer is not
in the best interests of CHIP REIT unitholders.
The offer is inadequate and unfair
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- No material increase in recurring distributable cash to CHIP REIT
unitholders is expected.
- To the extent that any benefits from the combination of the REITs
could be realized, they would flow primarily to Royal Host
unitholders.
- There is no clear enhancement of value to CHIP REIT unitholders.
- The offer provides only a negligible premium (2.4%) to CHIP REIT's
pre-announcement trading price.
Combining with Royal Host would weaken CHIP REIT's financial position
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- CHIP REIT is larger and better capitalized than Royal Host. The
combined entity would have a weaker balance sheet with a higher cost
of debt and reduced access to capital.
- The combined entity would have virtually no uncommitted cash or debt
capacity, restricting future growth prospects.
- CHIP REIT unitholders would be exposed to significant re-financing
risks with $70 million of Royal Host's debt due in the coming year.
- On May 20, 1999 -- the day after Royal Host announced their intention
to make an offer for CHIP REIT -- Canadian Bond Rating Service placed
CHIP REIT on credit watch with negative implications stating, ''If
successful, Royal Host's bid is expected to result in a REIT
possessing a much weaker credit profile than CHIP REIT would have on a
stand-alone basis.''
Combining with Royal Host would weaken CHIP REIT's hotel portfolio
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- Royal Host's portfolio is dominated by smaller, limited-service hotels
which are more susceptible to new competition. Their portfolio
reflects a business strategy that has been less attractive to
providers of debt and equity capital than CHIP REIT's strategy which
is founded on larger, full-service hotels.
Overstated synergies
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- Royal Host's claimed cost savings and synergies are significantly
overstated.
Negative tax implications
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- The exchange of CHIP REIT units for units of Royal Host will result in
tax being payable for some CHIP REIT unitholders, without providing
cash to unitholders to fund the taxes payable.
On Monday, CHIP REIT asked securities regulators to cease trade the Royal
Host offer because it contains misleading, inaccurate and incomplete
information that would prejudice CHIP REIT unitholders in assessing the value
of the Royal Host units being offered. CHIP REIT is concerned that Royal
Host's public financial forecast has not been updated as required since July
1998 despite a number of material changes to its business and operations.
Accordingly, Royal Host's 1999 forecast is of little use to CHIP REIT
unitholders in assessing the offer, and may be misleading.
''We are continuing to seek out and evaluate transactions that will
benefit our unitholders,'' said Eyton. ''The Special Committee of Trustees
has retained TD Securities Inc. and Merrill Lynch & Co. to assist in this
process.''
A Trustees' circular has been mailed to all CHIP REIT unitholders
detailing the Trustees' recommendation and the reasons for it, which includes
the supporting opinion from TD Securities.
CHIP REIT was Canada's first hotel real estate investment trust and has a
focus on mid-market and upscale full-service hotels. Through upgrades,
repositioning and franchising, CHIP REIT and its wholly-owned hotel manager,
CHIP Hospitality, improve the operating performance of the properties within
the portfolio to create value for investors. CHIP REIT currently owns and
operates 36 hotels with close to 8,000 rooms across Canada. CHIP REIT units
trade on The Toronto Stock Exchange under the symbol HOT.un.
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