Patriot Accepts Apollo Deal, Will Drop REIT Status

DALLAS? A long string of events at Patriot American Hospitality has saved the beleagured hotel company from financial disaster and set off a restructuring effort that will completely make over the REIT. The company agreed to a financial bailout offer from Apollo Real Estate Advisors, and is shedding its REIT status. It will merge with its operating firm Wyndham International, and will be led by Wyndham Chairman/CEO James Carreker as a regular tax-paying corporation renamed Wyndham International. Carreker replaces Paul Nussbaum, former CEO, who resigned but will stay on as chairman emeritus. Terms of the deal call for Apollo to invest $1 billion in Patriot by purchasing convertible stock and arrange $2.45 billion in loans to replace most of the $3 billion in debt that is due over the next year. The investor group will get an initial stake of between 29% and 41% in Patriot and will also hold eight of its 19 board seats. In addition to the $1 billion in proceeds from Apollo, Patriot has definitive financing commitments for $2.45 billion, consisting of $1.8 billion of senior bank facilities from Chase Manhattan Bank and $650 million of five-year senior secured loans from Chase Manhattan Bank and The Bear Stearns Companies. The proceeds from these commitments will be used to refinance the balance of the company?s bank debt and provide additional revolver capacity. High Costs For Patriot Also as part of the transaction, Patriot agreed to pay $166.4 million in fees including $52 million to Apollo for transaction expenses, $75 million to bankers? including Chase Manhattan, and $40 million to various advisers. Converting from a REIT will be expensive for Patriot American. The hotel investor and operator plans a noncash charge of $1 billion for deferred taxes, along with additional charges of about $120 million. But by dropping its REIT status, Patriot will no longer have to pay out 95% of its net income to shareholders in the form of dividends, saving about $125 million annually before taxes. The downside is that Patiort will begin paying federal income taxes once the conversion to a corporation as Wyndham International is complete. Executives at the company say that Patriot will also sell more than 100 properties under brands such as Hilton, Radisson and Embassy Suites. This will reduce the more than $34 million the company pays in franchise fees per year. Carreker said he plans to focus on growing Patriot?s two main chains? Wyndham and the Grand Bay Resorts, by reflagging hotels already owned by Patriot and through selective purchasing in key areas such as New York or San Francisco. ?I?m convinced our business strategy is as right as ever,? he said. ?this equity infusion will enable the company to significantly strenghten its balance sheet, reducing leverage and providing the resources it needs to execute a focused growth strategy building on its core businesses.? Patriot rejected an offer from Hilton Hotels Corp. to buy some of its hotels for as much as $1 billion and arrange refinancing of Patriot?s debt. The company said Apollo?s offer made more sense because it would only dilute the value of existing shares instead of leaving the company without most of its best hotels. Industry sources say that Nussbaum grew Patriot too quickly, binging on $4.5 billion in hotel assets that pushed the company into unrecoverable debt. Last fall the company ran into liquidity problems when it could not refinance its debt. During the last year, the company?s stock fell more than 75%. The drop made it difficult for Patriot to refinance short-term debt. During the fourth quarter of 1998, Patriot lost $91 million on $630.3 million in revenue. The company also took $85 million in charges for transactions and losses on assets sold. It sold seven hotels for $55 million.