MeriStar Hotels & Resorts to Merge with Interstate Hotels

MeriStar Hotels & Resorts (NYSE: MMH) and Interstate Hotels Corporation (Nasdaq: IHCO), the nation’s two largest independent hotel management companies, today announced that they have signed a definitive agreement to merge.

The combined company will be the premier independent hotel operator in the world, operating more than 86,000 rooms in 412 hotels, representing over 30 franchise brands in North America and Europe. The combined company will possess expansive operational and financial resources enabling it to provide state-of-the-art services to hotel owners.

The combined company, to be named Interstate Hotels Corporation, will include BridgeStreet Corporate Housing Worldwide and Doral Resorts & Conference Centers. It will have estimated 2002 pro forma revenues of $340 million, and estimated pro forma EBITDA of $33 million to $35 million. The transaction is valued at approximately $68 million based on MeriStar’s closing stock price of $1.21 on May 1, resulting in a total market capitalization of $260 million for the combined company.

The combined company will be headquartered in Washington, D.C. while maintaining a significant operating presence in Pittsburgh. Paul W. Whetsell, MeriStar chairman and chief executive officer, and John Emery, president and chief operating officer, will continue in those roles for the merged company. Interstate’s Chairman and Chief Executive Officer Thomas F. Hewitt will serve on the combined company’s board of directors. The combined company’s board of directors initially will include six members nominated by MeriStar and seven members nominated by Interstate, of which five initially will be representatives from Interstate’s Investor Group.

“The merger will create an independent hotel management company with a portfolio of more than 400 properties in the United States, Canada and Russia, which will allow us to achieve significant economies of scale,” said Whetsell. “We expect synergistic corporate savings of between $8 million and $10 million on an annualized basis. The merger will be accretive to stockholders in 2002.”


Commenting on the merger, Hewitt said, “Since our spin-off from Wyndham International, we have been committed to strengthening the financial structure of our organization and strategically growing the company. We have overwhelmingly concluded that this transaction is in the best interests of our stockholders. We believe the combined company will offer stockholders of both companies a strong platform for future growth.

In addition, we will be a stronger, more efficient operator, allowing us to generate higher returns for our owners and, as a result, higher management fees for the new company than we could have achieved operating separately,” Hewitt said. “Both companies’ properties are complementary, and Interstate’s presence in Eastern Europe, combined with MeriStar’s
BridgeStreet Corporate Housing Worldwide division’s experience in Western Europe, creates additional growth avenues.”

“Both Interstate and MeriStar have a highly focused emphasis on customer service and generating the highest possible returns for their owners,” Whetsell said. “Our initial internal mission will be to meld our highly similar operating philosophies into one common culture and focus on associate retention. We expect the transaction to be virtually seamless to employees at our hotels.”

In the tax-free, stock-for-stock merger of Interstate into MeriStar, Interstate stockholders will receive 4.6 shares of the surviving company’s common stock for each share of the 12.2 million shares of Interstate common stock outstanding and each of the 39.4 million existing shares of MeriStar common stock and operating partnership units will remain outstanding. All Interstate stock options will be converted into options to purchase shares of the combined company.
The consummation of the merger is subject to various conditions, including U.S. antitrust clearance and the respective approvals of the stockholders of Interstate and MeriStar. The stockholders meetings and the closing are expected to occur in the third quarter of 2002. MeriStar or Interstate may each receive from the other a termination fee of $2 million plus up to $500,000 in expenses if the merger agreement is terminated by the other party under various circumstances.

In connection with the transaction, Interstate’s Investor Group will convert its Interstate convertible debt and preferred equity into shares of common stock of the combined company and receive a payment of $9.25 million. The Investor Group and Interstate senior management have committed to vote in favor of the merger their Class A common stock, which will constitute approximately 57 percent of Interstate’s common stock expected to be outstanding at the time of the Interstate stockholders meeting. Oak Hill Capital Partners and its affiliates and MeriStar management, which collectively own 22 percent of MeriStar common stock, have agreed to vote their shares in favor of the merger.

The respective boards of directors approved the transaction yesterday. The Interstate board action was based in part upon the recommendation of its Special Committee of independent directors. Each board received a fairness opinion from its respective financial advisor. Salomon Smith Barney advised MeriStar in the transaction and Merrill Lynch advised Interstate.

“Due to economies of scale, a larger customer base, and an improved capital structure, the merged company will have expanded avenues of growth,” Emery said. “The new company will have a real estate joint venture in place to acquire $300 million to $500 million of hotel assets, and up to $50 million of cash and availability on its line of credit to participate in joint ventures.”

The hotel management business unit will use its expanded resources to provide current and prospective owners with a wide array of improved services and benefits, including Internet- based business information systems providing real-time data for better yield management and cost control; broader electronic and direct sales resources, including more than 2,000 sales professionals; increased cost efficiency through national purchasing; and capital for co-investments and joint ventures.

BridgeStreet’s growth will be gained through expansion of its national client base and European operations, as well as its recently established licensing program for North American markets.