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Interstate in $68 million merger

Hotel company's deal with MeriStar sends headquarters to D.C.

Friday, May 03, 2002

By Dan Fitzpatrick, Post-Gazette Staff Writer

Green Tree hotel manager Interstate Hotels Corp., founded 41 years ago by Pittsburgh attorneys Milt Fine and Ed Perlow, yesterday announced a $68 million merger with Washington, D.C.-based MeriStar Hotels & Resorts that would preserve Interstate's name but move its headquarters to the nation's capital.

The combined company, officials said yesterday, would keep a "significant operating presence" in Pittsburgh, where Interstate employs about 130 people at the Foster Plaza office park and another 220 at three hotels -- the Oakland Residence Inn, the Residence Inn by Marriott Pittsburgh Airport and the Pittsburgh Country Inn & Suites.

MeriStar Chief Executive Officer Paul Whetsell, in a conference call with analysts yesterday, reaffirmed his plans to keep a strong presence in southwestern Pennsylvania but was unwilling to predict how many Pittsburgh-area Interstate employees would keep their jobs, saying, "We just haven't gotten into that level of detail."

If approved by Interstate shareholders, who would receive 4.6 shares of the combined company's common stock for each of their 12.2 million common shares, the MeriStar-Interstate deal would combine the nation's No. 1 and No. 2 independent hotel management companies. The new company, to be named Interstate Hotels Corp., would operate 412 hotels in North America and Europe.

Interstate's stock rose almost 50 percent on the news, ending the day at $3.91. MeriStar's stock dropped 21 percent, to 95 cents.

The merger announcement sets up a showdown with Shaner Hotel Group, the State College company that recently made an unsolicited tender offer for 46 percent of Interstate's outstanding shares. Shaner already controls more than 5 percent of Interstate's stock. Shaner's offer, which expires May 31, would give Shaner a controlling stake in the company.

Shaner, which has made four offers to buy Interstate since October 2000 and had its most recent offer rejected by Interstate last week, stood by its $3-per-share offer yesterday, claiming that Shaner's "persistent pursuit" of Interstate forced the board "into action."

While the MeriStar deal "may finally relieve investors from Interstate's excessive executive compensation, poor performance and mounting financial losses," Shaner said in a statement, "the MeriStar deal trades one underperforming stock for another, only in greater quantities. The benefit to Interstate shareholders is missing here."

But one shareholder, Paul O'Leary of New York-based Raffles Associates, said the MeriStar deal "looks better than anything we have seen before, better than just staying as we were, better than the offers we have seen put on the table so far. We are still analyzing the acquiring company to see what kind of upside there is in its stock. The initial indication is that there may be substantial upside in MeriStar."

If MeriStar's stock continues to trade under $1, it could be delisted from the New York Stock Exchange. Still, O'Leary, who controls more than 5 percent of Interstate's stock, said the MeriStar deal appears more lucrative than Shaner's. "It seems like Shaner's $3 bid is not going to be competitive unless there is another substantial drop in MeriStar's stock price."

Pittsburgh hotel finance executive Mark Popovich, who has worked with Interstate in the past, said that "I think the Shaner deal is dead . . . I think it was dead even without this merger." He cited a letter that Interstate Chief Executive Officer Thomas Hewitt issued to shareholders last week, when Hewitt described Shaner's offer as "financially inadequate" and outlined his reasons for rejecting the bid. "They have some pretty compelling points as to why the Shaner proposal didn't make sense for them," said Popovich, who works for Holliday Fenoglio Fowler L.P.

The merger, Popovich said, "is probably a great move for Interstate. MeriStar is the largest independent hotel company. They are marrying the best of the best."

Industry observers agree that Interstate is no longer the company it once was.

Two Pittsburgh attorneys, Fine and Perlow, founded the company in 1961 by investing in an Erie motor lodge known as the Capri Motel. The duo began developing Howard Johnson Motor Lodges along Pennsylvania's interstate highways in the 1960s, while building a portfolio of hotel management contracts. In 1972, Interstate got its first Marriott franchise for the Pittsburgh Green Tree Marriott, and it went on to develop Marriott hotels in several cities around the country.

Perlow died in the 1980s, and Fine decided to sell the company for $2.1 billion in 1997 to Patriot American Hospitality. Patriot, which later changed its name to Wyndham International Inc., spun off Interstate in June 1999 after a difficult yearlong marriage, making Interstate an independent company once again. Wyndham kept most of Interstate's real estate, and the company has not gained profitability since the spinoff.

Popovich ackowledged that Interstate's move to Washington, D.C. would represent a symbolic loss for the region, but he also emphasized how important it was that Interstate keeps its name. "It may not mean a lot for our region, but I think it speaks volumes for the respect that the name Interstate has in the industry."

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