Are Extended Stay Shares Safe To Buy Yet?

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Extended Stay America, Inc. (NYSE: STAY) held up rather well on Thursday considering that it priced a 21 million share secondary offering. This added millions more of shares on the market, but it also helps in the long continual process of removing the private equity overhang from all the shares that will eventually come to market.

24/7 Wall St. simply wants to know one thing for long-term investors — is it safe to buy Extended Stay America’s stock yet?

This 21 million share offering had a massive underwriting group and it was priced at $21.75 per share. Unlike most common secondary offerings the Extended Stay stock was paired with a Class B stock of ESH Hospitality, Inc. This wasn’t the first time these two stocks have paired together, dating back to their initial public offering in November of 2013, but it sure makes the prospectus a different sort of read compared to traditional IPO and secondary offering reports.

The private equity holders selling stock were affiliates of Centerbridge Partners, and affiliates of Paulson & Co. and The Blackstone Group LP (NYSE: BX). These sellers granted the underwriters a 30-day overallotment option to purchase up to an additional 3,150,000 paired shares from the company.

So, how does this secondary offering compare to the IPO? In some cases, they were very similar. Extended Stay’s initial public offering last November was 28.25 million paired shares with the pricing at $20.00. So, the secondary came with a higher price but a lower share count.

In the 9 months that Extended Stay has been on the market, the stock’s range has been $20.62 to $26.83. In the wake of its secondary offering Thursday it traded within the range of $21.75 and $22.65. The average daily volume of it has been 481,440 but Thursday blew that out with a volume of over 8.6 million shares.

When Extended Stay America reported earnings last week, it said that it still expected 2014 revenues to be very close to what was a  consensus estimates of $1.23 billion.

What new investors need to consider, outside of the stock selling off marginally since earnings, is that new investors are getting to buy shares cheaper than had they bought immediately after the initial public offering. Again, Extended Stay shares rose above $26 in February of this year. Still – is it cheap enough considering the private equity overhang?

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The stock closed at $21.88 on Thursday, actually up 2-cents on the day. What investors need to consider is that of the 7 million shares sold by each of the private equity backers, each will still hold some 48,711,591 paired shares after the offering — giving ownership stakes for each of the three groups at 23.3% if the overallotment option is exercised and 23.8% if not.

Tally all of this up and the three large private equity backers still hold close to 70% of the paired shares. That means that some of the overhang is gone, but perhaps nowhere close enough that new investors can feel as though they have any real say in the company.