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Second-quarter M&A activity a good sign for economic recovery

Although the estimated $7.9 billion acquisition of Constellation Energy Group by Exelon Corp. was the quarter’s biggest mergers-and-acquisition deal, for the last three months it has been all about real estate.

According to data compiled by Bloomberg Financial exclusively for The Daily Record, 75 deals took place the second quarter of 2011, compared to 73 in the first three months of 2011. Fifteen of the deals included the acquisition of either hotels or other land and properties by real estate investment trusts.

The mergers and acquisitions include pending and completed deals in which Maryland companies were the buyers, sellers or targets. In terms of the number of deals, it was the busiest it has been since the third quarter of 2006.

“It’s a good sign for the economic recovery when you start to see assets turn over,” said Richard Clinch, director of economic development at the Jacob France Institute of the University of Baltimore. “It shows businesses have faith they will get something for them, or from them.”

In the quarter’s biggest deal, Baltimore-based Constellation agreed to be acquired by Chicago-based Exelon in an all-stock deal. The deal is expected to close in the first quarter of 2012, pending a number of regulatory approvals at the state and federal levels as well as shareholder approval from both companies.

Constellation also stayed busy in the quarter, independent of Exelon. In a pair of all-cash deals in May, the Baltimore-based Fortune 500 company picked up Star Tex Power LLC in Texas for $142.5 million and MXEnergy Holdings Inc. in Connecticut for $175 million. The MXEnergy deal added 540,000 customers in North America to Constellation, doubling its retail customer base.

Other large deals during the quarter include Sparks-based McCormick & Co.’s pending all-cash purchase of Kamis SA, a Polish spice maker, for $297.15 million. During the quarter, Columbia-based Integral Systems Inc. became the target in a cash-and-stock deal from Kratos Defense and Security Solutions Inc., which is valued at $260 million.

Hotel buying spree

But it was the real estate investment trusts based in Maryland, flush with cash, that drove many of the deals in the quarter. Companies including Pebblebrook Hotel Trust, DiamondRock Hospitality Co. and LaSalle Hotel Properties accounted for eight of the 15 largest reported deals for the second quarter, picking up properties nationwide, from the Hotel Monaco Seattle to the Park Central Hotel in midtown Manhattan.

Michael J. Salinsky, a senior REIT analyst at RBC Capital Markets, said REITs have been active this quarter and last for a very simple reason.

“They have been able to go out and buy good properties at a good price,” he said.

The busiest REIT during the quarter was Pebblebrook, which snapped up 10 properties, including six in one New York City deal alone. That deal, the largest for the Bethesda-based real estate investment trust, was for $910 million, all in cash. Factoring in first-quarter deals, Pebblebrook has more than doubled the nine hotels the 2-year-old company had in its portfolio at the start of the year.

“It’s been a great year so far for us, and it’s not even halfway over,” said Raymond D. Martz, chief financial officer for Pebblebrook Hotel Trust.

Martz said there were more opportunities than the company expected to see at this point in the cycle, and they were also of a higher quality than was thought to be out there.

“Our acquisition activity is well above what we thought,” Martz said. “We had planned on spending about $75 million a quarter in acquisitions, or about one a quarter. Instead, we’ve been averaging about $75 million a month.”

The REIT’s biggest deal was acquiring a 49 percent stake in a joint venture with Denihan Hospitality for six upscale Manhattan hotels — the Affinia Manhattan, Affinia Shelburne, Affinia Dumont, Affinia 50, Affinia Gardens and The Benjamin. The deal valued the hotels at $910 million.

In addition to the Denihan deal, Pebblebrook bought the Mondrian Los Angeles from Morgans Hotel Group Co. for $137 million and the Westin Gaslamp Quarter Hotel in San Diego for $110 million. Pebblebrook also bought the Viceroy Miami for $36.5 million in May and the Hotel Monaco Seattle in April for $51.2 million.

Bethesda-based LaSalle Hotel Properties, also a REIT, scored the second- largest hotel purchase of the quarter when it acquired the Park Central Hotel in New York City for $405.5 million in June.

DiamondRock Hospitality, a REIT also based in Bethesda, picked up multiple properties during the quarter. The REIT bought the Radisson Lexington Hotel in New York for $335 million in an all-cash deal first reported in May. It also acquired the JW Marriott Denver for $72.6 million in May.

One reason REITs have been active of late is that as the tourism and travel sectors strengthen, there is not as much in the development pipeline in the major markets.

“If you look out over the next few years, it’s pretty modest,” Salinsky said. “And that has set the stage for this kind of activity. That’s been the major driver so far.”

One of the drivers of the increase in hotel acquisitions is that it can often cost more to build new than it would cost to buy an existing property and renovate.

Unreported deals

Big deals in which the details were not made public this quarter include Laureate Education Inc.’s purchase of the Instituto Superior de Linguas e Administracao in Lisbon, Portugal, and Sinclair Broadcast Group Inc.’s acquisition of the Ring of Honor Wrestling pro wrestling organization.

And in a rare deal involving two smaller banks that had nothing to do with a banking powerhouse from outside the state, 132-year-old and newly publicly traded Fairmount Bancorp Inc. agreed to buy Fullerton Federal Savings Association. In May, the two single-branch Baltimore County-based banks agreed to merge in a deal that is expected to close by the end of the year.

As of March 31, Fairmount had $72.9 million in total assets while Fullerton had $8.9 million in total assets. Fairmount will be the surviving entity if the deal is completed.


The majority of the deals in the second quarter were all in cash, as opposed to all-stock or a mix. Clinch said the likely reason is companies and lenders who have been sitting on cash waiting for things to improve now see things as getting better.

“This shows that things are beginning to recover, these businesses feel comfortable doing deals,” Clinch said.

Ronald Kerdasha Jr., a group senior vice president in the Baltimore office of Cole Taylor Business Capital, a division of Chicago-based Cole Taylor Bank, said companies are looking to spend some of the money that has been on hold in recent times to grow. He agreed that the increased activity is an indicator that businesses are looking to put that cash to work now.

“What we’re seeing now is a lot of money chasing deals,” Kerdasha said. “There seems to be a lot of money looking for a home as opposed to sitting on the sidelines.”

Banks are back

Something new this quarter was the re-emergence — to some degree — of banks providing equity to make the deals happen. Faced with their own economic problems and holding on to capital to cover bad loans, banks have not been lending at levels they had in the past.

“In 2009 and 2010, lending was sparse and on very onerous terms,” Martz said. “But, now we’re seeing more interest from banks — not a flood, but there are more banks involved than there have been.”

With banks less involved, the slack was picked up by private equity. According to Bloomberg, private equity was involved in 18 of the deals in Maryland, up from 15 in the first quarter of 2011.

But experts say bank activity is beginning to be noticeable again in mergers and acquisitions deals.

“Private equity and mezzanine lenders are much more aggressive putting money to work,” Kerdasha said. “And, at the same time banks have been more aggressive putting their money to work — they have stepped up.”

While bank activity in deals is on the increase, it is not expected to rebound to pre-recession levels anytime soon.

“Banks are getting back into the market,” Clinch said. “But, they’re not leaping back into the market, nor do I think they will.”


With the number of deals on the increase for the third quarter, there is optimism that the trend will continue.

“In the early parts of any recovery, businesses tend to have cash and are sitting on it,” Clinch said. “So sellers are motivated since it’s no longer the trough of the market, and they’re looking at non-core or underperforming assets and looking at getting rid of them.”   See above

Kerdasha said at Cole Taylor, which focuses mainly on corporate buyouts in smaller deals, activity has been brisk. He said the expectation is that the mergers-and-acquisitions activity level will continue throughout 2011.

“Most people I’ve talked to have been active — there’s a lot going on and that’s likely to continue,” Kerdasha said.

Deal activity at the REITs in the state is also expected to stay strong as companies keep an eye out for properties with opportunity.

“You’re going to continue to see increased activity this year,” Salinsky said. “And, not just buying but you should see some of these REITs recycling as well.”

Martz said that while Pebblebrook has been buying at a level above what it had planned, it would continue to stay on the lookout for a good deal.

“We’re an opportunistic investor,” Martz said. “When we see an opportunity we will continue to make acquisitions.”