The hotel owner fell 17% on Monday to $5.93, below its close before TKO's cash offer became public. The non-binding proposal expires Friday, and SVC would have to pay to end its Sonesta management contracts.
A cash offer for Service Properties Trust's hotels is worth more than twice the entire company's stock market value. One trading day after the offer became public, the shares were cheaper than before anyone had heard of it.
SVC fell 17.06% on Monday to $5.93, on volume of about 6.5 million shares, nearly four times the turnover of Oct. 8. The close was about 4.7% below the $6.22 at which the stock finished on Oct. 8, the last session before the proposal became public. On Oct. 9 the shares had jumped about 15% to $7.15.
Monday's decline erased about 131% of the offer-day gain. Neither SVC nor TKO released any statement during the session, and no explanation for the decline emerged.
The Proposal
TKO LLC, which describes itself as a privately held real estate investment firm, proposed in a letter dated Oct. 7 to buy SVC's owned hotels for $2 billion, "payable entirely in cash at closing," with "no financing contingency." SVC confirmed it had received the unsolicited proposal and said it had no prior contact with TKO. Its board said it will review the offer.
At Monday's close, SVC's market value was about $768 million. The bid is about 2.6 times that.
What The Letter Says
The terms explain part of the gap between the headline and the share price. "Only Sections 8 and 9 of this letter are binding upon countersignature by Seller. All other terms are nonbinding," the letter states. The binding sections cover exclusivity and the letter's own effect.
TKO would deposit $15 million, or 0.75% of the price, after signing a purchase agreement, and the deposit "would remain refundable through the diligence deadline." SVC would keep "all other liabilities, including secured and unsecured indebtedness." Its management and franchise agreements with Sonesta International Hotels would be terminated, and SVC "shall be solely responsible" for termination fees, liquidated damages and related costs. The letter does not estimate those costs. SVC's net-lease properties and its equity stake in Sonesta are excluded.
The proposal "shall remain open for acceptance until 5:00 p.m. Eastern Time on October 16, 2026," unless TKO withdraws or extends it.
In its letter, TKO also asserted that sale proceeds "would retire over forty percent (40%)" of SVC's debt and that "additional zero-coupon notes will likely be required for the Company to continue rolling over its debt." SVC has not responded to those claims.
Not A Sector Move
Real estate stocks rose on Monday. The Vanguard Real Estate ETF gained 0.78%. Hotel owners not under offer were little changed: Park Hotels & Resorts was flat, Host Hotels & Resorts rose 0.40% and Apple Hospitality slipped 0.49%. The RMR Group, which manages SVC, rose 2.94%.
The selling built through the day rather than arriving in one burst. SVC opened at $7.30 and drifted lower for hours. About 2.5 million shares, roughly 39% of the day's volume, traded in the 15-minute window starting at 3:30 p.m., when the stock touched its low of $5.72.
Market Implications
One reading is that the price is a dislocation. A company confirmed a signed cash proposal worth 2.6 times its market value, with a deadline days away, and the market is valuing it as if the bid did not exist.
A second reading is that investors are discounting the bid and absorbing the letter's message. The proposal is almost entirely non-binding, the deposit is small and refundable, the cost of exiting the Sonesta contracts is unknown, and no evidence of TKO's financing has been made public.
What To Watch
SVC's board must respond, or TKO must extend, before 5 p.m. Eastern on Friday. Any proof of funds from TKO, an estimate of Sonesta termination costs or a competing bid would change the calculation.