Starwood Capital to make new bid for Extended Stay

Starwood Capital Group LLC will make a new bid for Extended Stay Hotels Inc., which in June filed the largest bankruptcy case by a U.S. hotel owner, a lawyer for Greewich-based Starwood said in court.

"We're interested in bidding for this company," Bruce Zirinksy told U.S. Bankruptcy Judge James Peck on Thursday at a hearing in Manhattan to approve the bidding procedures. "We think we have already, through our prior bid, increased the company's value by several hundreds of millions of dollars.

Starwood's earlier bid for the company, which had $7.6 billion in debt when it sought bankruptcy protection, was overtaken by one for $905.4 million from Centerbridge Partners LP and Paulson & Co. Zirinsky told Peck that he and his client learned Wednesday that Blackstone Group LP has joined Centerbridge-Paulson as a third partner in making the bid for Extended Stay.

David Lichtenstein's Lightstone Group LLC bought Extended Stay in 2007, relying on more than $7 billion in debt financing to complete the $8 billion deal weeks before the leveraged- buyout market imploded.

The bidding procedures were developed by Extended Stay and approved by Centerbridge and Paulson, according to court papers. Centerbridge and Paulson's investment offer would be, if Peck approves, the so-called stalking-horse bid that sets a minimum price for the company that others would have to top.

Debtors `Pleased'

"The debtors are very pleased on where we came out on these procedures and we hope the court will approve them," Jacqueline Marcus, a lawyer for Extended Stay, told Peck.

Extended Stay wants to set a May 17 deadline for investors' proposals, with an auction held May 27. If no qualifying bid is received, the company will ask the court on June 17 to approve the disclosure statement explaining the reorganization plan, including the Centerbridge-led offer.

Several parties, including the unsecured creditors, objected to a provision allowing the Centerbridge group to be involved in figuring the valuation method for comparing non-cash bids to cash bids.

"It creates a potential that one of the bidders is going to be able to determine how balls and strikes are going to be called," said Zirinsky of Greenberg Traurig LLP.

Bidding Procedures

Marcus, of Weil, Gotshal & Manges, said others could have input.

"Anybody who wants to discuss with Lazard that valuation methodology, we're happy to talk to them," she said.

Lazard Freres & Co. is Extended Stay's financial adviser.

Marcus said Thursday that the competing bids don't have to follow the same structure as the Centerbridge-led offer.

"We agree with the debtors and the other parties that the bidding procedures are reasonably acceptable as is," said Brad Scheler, a lawyer for Centerbridge and Paulson at Fried, Frank, Harris, Shriver & Jacobson LLP. "There will be bidding, additional bidding, and there will be change."

The creditors also asked that an examiner be appointed to oversee the bidding process and objected to a provision for a so-called credit bid, allowing the mortgage-debt holder to bid that secured debt, rather than cash, at auction.

Breakup Fees

At an April 8 hearing, Marcia Goldstein, a lawyer for Extended Stay at Weil Gotshal, said the company favored the Centerbridge-Paulson offer over Starwood's. Under the terms, Extended Stay can seek out better deals.

Starwood's offer was for the same amount. Centerbridge, a New York private-equity firm, and Paulson, a New York asset manager, eliminated breakup fees that Starwood required, making their offer economically superior, said Goldstein.

Zirinsky said today the original Starwood bid was better than the Centerbridge-led offer, a contention Marcus disagreed with.

"The Starwood proposal was not a better proposal because, importantly, it had certain" bid protections, Marcus said.

Starwood's bid was more than double an earlier one by Centerbridge, which Spartanburg, South Carolina-based Extended Stay rejected after the Starwood offer.

Centerbridge and Paulson made the new offer March 29, and Extended Stay has received a $150 million deposit from them, according to court documents.

The new Centerbridge-Paulson offer includes $450 million in cash, $200 million to backstop a rights offering and as much as $255.4 million to creditors who elect to take cash at a 30 percent discount to the value of the stock the reorganization plan otherwise would give them.

The $450 million equity injection is for 43 percent of the new company and the backstop represents another 19 percent.

Five Mile Capital Partners LLC, an alternative-investment firm in Stamford, Connecticut, and TPG, a private-equity firm in Fort Worth, Texas, are part of Starwood's investment group.