2nd UPDATE: Home Inns Close To Buying China's Motel 168 Chain

2nd UPDATE: Home Inns Close To Buying China's Motel 168 Chain - Sources

Nasdaq-listed Home Inns & Hotels Management Inc. (HMIN) is close to buying the company that owns China's Motel 168 chain from Morgan Stanley (MS) and other shareholders for about US$500 million in a cash and stock deal that will fetch around half what the owners originally sought, according to three people familiar with the transaction.

Morgan Stanley will be selling its 59% stake in Shanghai Motel Management Co. to Home Inns, China's biggest budget hotelier, while the other shareholders in Shanghai Motel will be exchanging their stakes for shares in the combined entity, one of the people said. He said Home Inns will be paying for the Morgan Stanley stake from a US$300 million loan it is raising at the moment, as well as its own cash. As of March 31, 2011, Home Inns had cash and cash equivalents of CNY2.29 billion.

Talks have been exclusive between Home Inns and Shanghai Motel for several weeks and the parties are now in advanced discussions about terms, another person said.

Shanghai Motel is the fifth-largest budget hotel chain in China by number of rooms, according to analysts, and buying it would help market leader Home Inns further expand its pole position. Home Inns, the largest budget chain operator in China by number of rooms, had gone head to head against China Lodging Group Ltd. (HTHT), the fourth largest budget hotelier, for the stake in Shanghai Motel.

Morgan Stanley controls 59% of Shanghai Motel Management Co. through one of the investment bank's real estate funds. It, as well as the other two shareholders of Shanghai Motel, had put the company up for sale in February, expecting it to fetch up to US$1 billion as foreign and domestic hoteliers scramble to buy into the country's travel boom.

But worries that Shanghai visitor traffic will fall from last year, when the city hosted the Shanghai Expo, and the opening of a record number of new hotels in China last year, have hurt Chinese budget hotel shares this year.

So far this year, shares of U.S.-listed Home Inns are down 11%; China Lodging is down 12%; 7 Days Group Holdings Ltd. (SVN), China's second-biggest chain, is 11% lower; and Shanghai International Jin Jiang Hotels Development, the third-biggest economy-hotel operator in China, has fallen 16%.

Analysts said this was a good deal for Home Inns, despite integration costs from a merger of the two sides.

"If Motel 168 is valued at US$500 million, that would put the value per room at about US$11,400, which is about 2% less than Home Inns' current Enterprise Value per room of $11,671, based on Home Inns current stock price," said Noah Hudson, research analyst at Guotai Junan (Hong Kong). "That's good for Home Inns because Motel 168 has about 37% of its hotels in Shanghai, where properties are more valuable, compared to Home Inns, which has about 9% of its hotels Shanghai."

Earlier this month, Home Inns posted a 42% drop in first quarter net profit on higher hotel costs and operating expenses, while the Chinese economy-hotel chain's adjusted earnings missed analysts' expectations.

It reported a profit of CNY32.5 million ($5 million), or CNY0.06 (a U.S. penny) a share, down from CNY46.1 million, or CNY0.54 a share, a year earlier. Excluding stock-based compensation and other impacts, adjusted earnings fell to CNY0.39 (6 U.S. cents) from CNY0.65. Analysts polled by Thomson Reuters expected a profit of 14 cents per American depositary share.

-By Nisha Gopalan, Dow Jones Newswires; 852-2832-2343; nisha.gopalan@dowjones.com

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