Three observations about Starwood’s takeover bid for ESR

The potential combination of two top 10 PERE 100 firms is unlike other private real estate M&A deals for multiple reasons.

Starwood Capital Group’s acquisition of a 10.7 percent equity stake in Asia industrial giant ESR Group in March was just the beginning.

This week, ESR announced it received a buyout proposal in late April from a consortium comprising the Miami-based firm, TPG-spin-out credit platform Sixth Street Partners and New York-based investment firm SSW Partners. Under the proposal, shareholders can either choose to receive cash or shares in the privatized company.

Starwood first got a foothold in the company after Redwood Investment Company, controlled by co-founders Charles de Portes and Stuart Gibson, fully repaid an existing debt to the firm.

While there are still many unknowns about the deal, including the offer price and the role Starwood is looking to play in ESR, here are three of PERE’s observations about what is potentially one of the biggest M&A private real estate transactions – involving two top 10 PERE 100 firms – this year.

One, with the exception of Brookfield’s majority stake purchase of Oaktree in 2019, few other M&A deals have involved the take-private of a manager. Yet Starwood likely would not have made a play for ESR were it not a public company. The latter firm’s low share price since it went public five years ago made it a takeover target for Starwood and its fellow investors in the consortium. ESR’s closing price stood at HK$8.35 ($1.07; €0.98) per share before the proposal was submitted on April 24. This represented a 50 percent drop from its listing price of HK$16.8 per share in 2019.

Two, few other managers would have gone after ESR, given the complexity of the company structure, which itself is the product of multiple prior combinations. But Barry Sternlicht, Starwood’s CEO, has built a career out of taking many companies private. With Starwood Capital, his take-privates have included the acquisition of Charlotte-based hotel chain operator Extended Stay America in partnership with Blackstone in 2021 and the takeover of Canada’s Milestone Apartments Real Estate Investment Trust in 2017.

Apart from Starwood’s track record in making privatization bids, the executives in the firm are more familiar with ESR’s business and structure than many of its peers. David Matheson, co-head of Europe at Starwood, was involved in key ESR events, such as its IPO in 2019 and its acquisition of Singaporean multi-asset manager ARA Asset Management in 2021, when he was an executive vice president for Europe and APAC at Oxford Properties. Oxford was the sole cornerstone investor in ESR’s IPO and Matheson sat on ESR’s board as a non-executive director from 2021 to 2022.

Third, the takeover of ESR will jump-start Starwood’s presence in Asia real estate. Apart from Starwood, only Ares Management and Cerberus Capital Management similarly lack a platform of scale in the region among the top 10 PERE 100 firms. With approximately $156 billion in total AUM focused on logistics, data centers and other alternative property types, ESR has a development and investment management platform extending across key APAC markets, including Australia, Japan, South Korea, China, Southeast Asia and India.

Indeed, Starwood’s privatization proposal for ESR endorses the premise that M&A is the fastest way for a manager to gain market share. Amid the ongoing consolidation of private real estate managers globally, the biggest managers continue to get bigger. Only with this deal, industry giants will be sitting on both sides of the negotiating table.