Hotel Employees Union To Oppose Security Capital Group's Bid for U.S. Realty

The union's 7-page counter-solicitation is being distributed to shareholders of U.S. Realty. "The offer on the table significantly undervalues US Realty's contribution to the combined company at the same time that shareholders will be giving up substantial ownership rights," said Nick Weiner, a research analyst with HERE. "Based on our analysis, the proposed deal is not in the best interests of US Realty shareholders," Weiner added.

Based on the concerns raised in the counter-solicitation, HERE urges shareholders of Luxembourg-based US Realty to vote no at the special meeting on January 16, 2001. Since the agreement requires two-thirds approval of US Realty shareholders, shareholders have an opportunity to insist on a more generous offer and address corporate governance concerns by voting against the proposed agreement.

The counter-solicitation identifies several reasons why the proposed transaction will be detrimental to US Realty shareholders if it is approved in its current form. First, shareholders will inherit Security Capital's poor corporate governance structure. The transaction significantly dilutes shareholders ownership rights.

While US Realty shareholders will own 33.1% of total shares outstanding, they will only be entitled to 16.4% of the total vote. "Under the terms of this deal, U.S. Realty's shareholders will be all but disenfranchised from the governance oversight of the new company," Weiner said.

Second, the 1.15 exchange ratio does not fairly reflect US Realty's contribution of Net Cash Flow from Operations and Earnings Before Depreciation, Amortization and Deferred Taxes (EBDADT). While the proposed transaction will provide US Realty shareholders with 33.1% of the shares of the combined company, they will provide a disproportionate share of net cash flow and EBDADT.

Third, Security Capital shareholders will disproportionately benefit in net asset value (NAV) accretion versus US Realty shareholders. US Realty shareholders' NAV increases only 1.7% while Security Capital's NAV increases 12.7% as a result of the proposed transaction.

Fourth, the offering price as a multiple of US Realty's net cash flow is significantly below the average multiple for comparable transactions. According to the fairness opinion produced by Goldman Sachs - the financial advisor to Security Capital - Security Capital's offering price is 8.4 times estimated net cash flow for the year, 36% below the average net cash flow multiple of 11.4 for similar transactions.

Security Capital has previously been accused of undervaluing affiliated companies for the purposes of stock buyouts. In April 2000, Homestead Village minority shareholders filed four class action lawsuits alleging that Security Capital's offering price of $3.40 per share in cash was unfair. In negotiations, Security Capital subsequently raised its offer to $4.10 per share.

Moreover, the connections between US Realty's board of directors and Security Capital raises questions about the "arms length" negotiations between U.S. Realty and its largest shareholder, Security Capital.

Despite the close relationship between the two companies, the directors of U.S. Realty still have a fiduciary obligation to seek the highest possible price for US Realty in a transaction that will maximize shareholder value.

HERE is a member of the Council of Institutional Investors and is active in shareholder corporate governance issues and has researched Security Capital in connection with an organizing drive at one of its affiliated companies, InterParking.