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Red Lion Faces Shareholder Criticism

 February 12, 2009 01:19 PM

Red Lion Hotels Corporation (NYSE: RLH) recently passed a shareholder rights plan (read: poison pill) designed to entrench management and prevent any so-called strategic alternatives. The move angered Columbia Pacific Opportunity Fund, the single largest shareholder of Red Lion. The hedge fund believes that Red Lion is substantially undervalued and should immediately pursue such alternatives to unlock that value for the benefit of shareholders.

Here's a copy of Columbia's letter to the board:
As the single largest shareholder of the Red Lion Hotels Corporation ("RLHC" or the "Company") we would like to express our sincere disagreement with the Board's recent adoption of a shareholder rights plan.  In addition, we would like to address the Company's current strategy.

Prior to our formal review process we indicated our belief that the Company's assets were undervalued.  In the process of evaluating the potential acquisition of RLHC, we engaged a number of consultants and advisors to assist us in our review of RLHC's real estate and the Company's position in the marketplaces in which it operates.  Following this process, we came to the following conclusions:

First, we believe RLHC should not be an independent public company.  The market capitalization of the Company is too small to justify public company costs and the Company lacks the operating scale and capital base to fulfill the current flawed growth strategy.  Second, much of RLHC's value is buried in underutilized real estate which is difficult to articulate to investors.  Third, in order to realize full value, RLHC should be liquidated in an orderly fashion or sold.The Company's current growth strategy focuses on acquiring and expanding the Red Lion brand with three to four-diamond hotel properties.  We do not believe the Company has the expertise or capital to successfully execute this strategy.  The Company's recent acquisition efforts in Denver and Anaheim demonstrate this flawed strategy.  These acquisitions have resulted in our opinion of over-paying and over-investing in assets.  As an independent company, it is too costly for RLHC to expand the Red Lion brand in such a manner.  We believe the Company should focus on extracting value out of its current asset base rather than increasing an inefficient and underappreciated platform.

What originally attracted us to the Company was the focus on the Pacific Northwest and our impression that the real estate was undervalued by the market.  The Company's assets are now more undervalued than ever and we believe that even in a depressed marketplace the liquidation value of the Company is well in excess of the current market capitalization.  Our recommendation is for the Board to immediately remove the shareholder rights plan, and begin the process of liquidation or sale of the Company to return value to shareholders in the timeliest manner possible.

We expect the Board to put shareholders' interests ahead of management's interests.


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