LV hotels in large new REIT deal

Monday, March 16, 1998 | 9:59 a.m.

CapStar Hotel Co. and real estate investment trust American General Hospitality Corp. said today they will merge, creating a major REIT with a separately trading hotel management company.

The deal creates the hotel industry's first "paper clip" REIT. Similar to the paired-share structure that has made Starwood Hotels & Resorts a high flyer on the stock market, a paper-clip deal creates a separately trading company with the same management that pays most of its operating income as rent to the REIT.

The dual structure substantially reduces the corporate income tax on the businesses.

Two Las Vegas properties are a part of the deal. American General announced in January it was acquiring the Crowne Plaza, 4255 Paradise Road, and the St. Tropez All-Suite Hotel, 455 E. Harmon Ave., as part of a $138.4 million deal with Prime Hospitality Corp., Fairfield, N.J.

Under terms of that agreement, Prime was to continue to manage the American General acquisitions. Representatives of American General and CapStar were not available this morning to comment on the status of that arrangement in light of the deal announced today.

Under terms of today's agreement, CapStar, a hotel management company, will spin off its hotel operations and management business to its current shareholders as a new corporation to be called MeriStar Hotels & Resorts Inc.

CapStar then will merge into American General in a tax-free reorganization, more than doubling the REIT's holdings. The REIT, which will be renamed MeriStar Hospitality Corp., will own 110 hotels in 30 states and Canada. The REIT will have total market capitalization of about $3 billion.

CapStar shareholders will receive one share each in MeriStar Hospitality and MeriStar Hotels & Resorts for each CapStar share owned.

American General Hospitality shareholders will receive 0.8475 shares of MeriStar Hospitality for each American General share owned.

The new company, MeriStar Hotels & Resorts Inc., will acquire privately held American General Hospitality Inc. and AGH Leasing L.P. for $95 million in cash and units of limited partnership interest.

Because of their tax advantages, REITs are not allowed to operate certain businesses. Paper-clipping is seen as the best way to let REITs dabble in operating businesses. For example, an office building REIT that wants to sell secretarial services to its tenants could establish a paper-clipped sister company to do that.

CapStar and American General said they expect to save $5 million to $10 million in the first year of combined operations, including tax savings. The companies said they also see savings in purchasing, insurance and related activities. They expect the merger to add to earnings before the end of the year.

Paul W. Whetsell, CapStar's chairman and chief executive, will be chairman and CEO of the combined companies. Steven Jorns, American General's chairman and chief financial officer, will serve as vice-chairman and chief operating officer of the combined companies.

David McCaslin, CapStar's chief operating officer, will be president of MeriStar Hotels & Resorts, and Bruce Wiles, American General's executive vice president, will be president of MeriStar Hospitality.

MeriStar Hospitality said it plans to shed holdings that no longer fit its long-term strategy of owning large, upscale, full-service hotels in urban markets. It said it may sell limited-service and mid-market hotels, as well as one office building owned by the REIT.

The merged companies will be based in Washington and will maintain a regional and accounting office in Dallas.

The boards of CapStar and American General unanimously approved the merger, which the companies said will create the nation's third largest hotel REIT and second largest independent hotel management company.

The transaction should be completed in June, pending approval by regulatory authorities and shareholders.