Unfortunately, the CorePoint (NYSE:CPLG) opportunity is coming to an end lower and sooner than expected. The two-pronged approach was on the one hand the company reaching positive EBITDAre and FFO attributable to common stockholders. On the other, it's still disposing its non-core hotels at attractive multiples and quite fast. I describe the company strategy in my previous two articles:
CorePoint Lodging: Check In At Its Core Portfolio For $100 Million
CorePoint Lodging: Disposal Strategy Still In Check
CorePoint presented 3Q2021 results on Nov. 8 along with a statement that told they entered into a definitive agreement with Cerberus to buy CPLG for $1.5 billion in cash or $15.65 per share. The strange thing was that the company stock price had close at $17.756 the day before the announcement. The press release said:
Under the terms of the merger agreement, Highgate and Cerberus will acquire all outstanding shares of CorePoint common stock in an all-cash transaction valued at approximately $1.5 billion based on the $15.65 per share consideration, which reflects the assumption of current net debt and a $160 million buyer liability reserve for the Internal Revenue Service ("IRS") matter detailed below. This price represents a premium of approximately 42% to CorePoint's closing share price on July 13, 2021, the last trading day prior to the Company's public announcement of its strategic alternatives process.
So they actually calculated the premium based on the price the day before of its strategic review process announcement, which is odd since normally it should be the day before the merger agreement announcement. But presenting a negative premium is not actually a good strategy for shareholders to vote in favor of the merger. The reason for the lower price vs. the stock market price is the IRS tax settlement that will cost around $155 million to CorePoint or around $2.71 per share. But even with this liability the offer undervalues the company future potential and based on previous hotel sales.
While valuations always are a little subjective, the CPLG offer undervalues the company even with conservative assumptions let alone with a more positive outlook on the company. In fact, an orderly liquidation may be better for shareholders vs. the current offer. The CPLG liquidation value is around the non-core hotels that haven't sold yet plus the core hotels minus debt and other liabilities. The disposal strategy so far:
|Obj||Non-core Hotels||Nr||Value ($millions)|
|78||Phase 1 already sold||73||291|
|Phase 1 under contract||0||0|
|Phase 1 left to dispose||5||20|
|132||Phase 2 already sold||86||477|
|Phase 2 under contract||38||264|
|Phase 2 left to dispose||8||48|
The company sold 73 phase 1 hotels for around $4 million each so the five hotels left are worth around $20 million. Remember this are the worst hotels the company had, with very low margins in unattractive markets for CPLG. The phase 2 hotels were CPLG second tier hotels, and of the 132 identified, the company already sold or has on contract 124 hotels for an average price of $6 million each. So, the last eight remaining are worth around $48 million. Which means the company's non-core assets are worth $332 million. Remember, hotels under contract are hotels that the company haven't sold yet but they're on a more advanced stage, so the company has 51 hotels on the sales pipeline from phase 1 and phase 2.
The company strategy was to sell the low and second tier hotels and keep the high margin ones. The high margin hotels would allow the company to achieve higher margins and higher FFO and probably higher dividends, which at the moment are non-existent due to the pandemic cost cutting measures. Therefore, these hotels would be obviously sold by higher multiples.
According to the 2Q2021 call, since the beginning of the disposal strategy the company sold 147 hotels at 2019 average revenue multiple of 2.6x. But these were hotels with EBITDAre margins lower than 20%, while the core hotels had EBITDAre margins above 25% (2019 values). Nevertheless, if the same sales multiple is applied the value of CPLG comes higher than the offer.
|Liquidation 2.6x revenues ($ millions)|
|Core hotels (2019 revenue)||410|
|Rev multiple (x)||2.6|
|Core hotels value||1.066|
|CPLG value per share||16.2|
If we apply a bigger multiple, the core hotels are much better than the phase 1 and 2 hotels and also because their average age is much lower. While the average age of the phase 1 and 2 hotels were 32 years old and 28 years old, respectively, the core hotels average age is only 18 years old. If we apply a 3x revenue multiple to account for the difference in the asset quality the value of CorePoint comes much higher.
|Liquidation 3x revenues ($ millions)|
|Core hotels (2019 revenue)||410|
|Rev multiple (x)||3.0|
|Core hotels value||1.230|
|CPLG value per share||19.0|
The reality is that as going concern CorePoint's value will be much higher than $19 per share.
|Core hotels EBITDAre (FY2019)||108|
|Corporate G&A expenses||20|
|CPLG core EBITDAre (FY201)||88|
|CPLG core valuation||1.584|
|Non core hotels||332|
|Tax liability settlement||155|
|Equity per share||25.2|
The offer appears indeed very low for the quality of CorePoint Lodging core hotels. While the macro context is one that asks for a certain caution it does not mean that CPLG management should be giving shareholders hotels for a low-ball offer.
The reality is that in spite the low offer made by Cerberus, it's probable the offer will win a yes vote from shareholders. First, Blackstone owns 30% of the company and entered into an agreement of voting yes in the shareholders meeting. Secondly, some ETFs that own the company will not vote, for example Vanguard owns 6.9% of the company. And last, there are a lot of shareholders who are sitting on gigantic capital gains after the company rallied from around $4 per share to the current $15.5 per share. It was great run but it's time to find better setups.
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Disclosure: I/we have a beneficial long position in the shares of CPLG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I may buy, add or sell without giving notice here. Do your own research.
I will probably sell my shares before the deal closes.