Mercury Real Estate Advisors Discloses 9.4% Stake in Sonesta (SNSTA), Applauds Move To Explore Strategic Options

In a 13D filing on Sonesta International Hotels Corp. (Nasdaq: SNSTA), Mercury Real Estate Advisors LLC disclosed a 9.4% stake in the company and noted they changed their filing status from 13G to 13D. The firm also disclosed a letter to Sonesta applauding the company move to hire Goldman Sachs to explore strategic options.

From the Letter, "We applaud your decision to undertake this strategic review, as it has been clear to us for some time that the Company’s diminutive size, controlling family ownership and consequent share illiquidity make Sonesta ill-suited to be a publicly traded company. Our belief was compounded by the recent closure of the Sonesta Key Biscayne Hotel in anticipation of its redevelopment as a luxury condominium project. While the transaction made sound business sense, it substantially reduced the Company’s already small revenue base. Overall, it is not efficient for a company with a $115 million equity capitalization to try to incur the sizeable legal, accounting, regulatory costs that are borne by a public company, all of which are even more burdensome under Sarbanes-Oxley."

A Copy of the Letter:

Dear Directors:

Mercury Real Estate Advisors LLC (“Mercury”), together with its managed investment funds, is the largest independent shareholder of Sonesta International Hotels Corporation (“Sonesta” or the “Company”), owning a reported stake of 9.4% in the Company. As you are aware, we have been a long term and supportive shareholder of the Company. We are writing in response to the Company’s announcement on June 4, 2007 that it had hired Goldman, Sachs & Co. to assist it in a review of strategic options available to the Company to enhance shareholder value.

We applaud your decision to undertake this strategic review, as it has been clear to us for some time that the Company’s diminutive size, controlling family ownership and consequent share illiquidity make Sonesta ill-suited to be a publicly traded company. Our belief was compounded by the recent closure of the Sonesta Key Biscayne Hotel in anticipation of its redevelopment as a luxury condominium project. While the transaction made sound business sense, it substantially reduced the Company’s already small revenue base. Overall, it is not efficient for a company with a $115 million equity capitalization to try to incur the sizeable legal, accounting, regulatory costs that are borne by a public company, all of which are even more burdensome under Sarbanes-Oxley.

We further believe that the Company’s attractive assets are not appropriately valued in a public market obsessed with quarterly earnings. With modest net debt associated with the well-located 400 room Royal Sonesta Hotel Boston (Cambridge) and the significant value imbedded in the unique Key Biscayne property (the land is conservatively valued at $160 million and significant development profits are yet to be reaped), we believe that the intrinsic value of Sonesta is dramatically in excess of the current public market value.

Another reason for pursuing strategic alternatives is the unique market opportunity created by a growing number of investors interested in purchasing real estate assets, especially hotel assets. The dramatic growth of the private equity real estate funds, in particular, has spawned a number of public real estate mergers and acquisitions over the last two years, including ten completed or pending transactions in the United States hospitality business alone, according to SNL Financial. These acquisitions include La Quinta Corporation, MeriStar Hospitality, Boykin Lodging, Jameson Inns, Four Seasons Hotels, Winston Hotels, Innkeepers USA Trust, Highland Hospitality, Eagle Hospitality and most recently Equity Inns.

Given the Company’s undervalued share price, the impracticalities associated with being a public company and the intense interest among investors in companies like Sonesta, it is very timely that the Company explores strategic options, including either selling its assets or soliciting a buyout offer. A recent article in the Wall Street Journal on June 21, 2007 entitled “Hotel Buying Frenzy Intensifies” highlighted the extremely strong demand for hotel assets from private-investment companies, with one of the demand drivers being that “hotel yields in the form of capitalization rates - the return on investment in the first year of ownership - are still relatively high compared with their other commercial real estate cousins.” These attractive relative yields are piquing the interest of many real estate private-investment companies that are flush with cash and actively seeking investment opportunities.

The study of strategic options in a family-run and family-controlled business does, however, warrant several important considerations. Sonesta is a company with seven of 11 executive officers belonging to the extended Sonnabend family, four of nine directors belonging to the extended Sonnabend family and 39.2% of the Company’s common stock owned by Sonnabend family executives or directors. We have also been advised that certain Sonnabend family members not serving as executive officers or directors also own a substantial percentage of the common stock, giving the entire Sonnabend family majority ownership of the Company. Given these facts, it is obvious that certain protective mechanisms must be instituted by the independent members of the Board of Directors to insure the integrity of the strategic process and protect the interests of minority shareholders. Unfortunately, we have seen far too many circumstances where similarly situated companies are the subject of a controlling family’s attempt to take such company private at a price that does not reflect the company’s intrinsic value.

We would strongly advise the independent members of the Board of Directors to institute in advance procedures to accomplish the following:

1. Gauge whether there is any potential family interest in taking the Company private. If so, the independent directors should immediately form a committee that hires independent legal and investment banking counsel.

2. Require that any interested party offer be subject to the approval of a majority of non-Sonnabend family shareholders

3. Resist any breakup fee or other restrictions that would chill the interest of third parties.

The independent members of the Board of Directors would appear to have the business standing and professional expertise to be completely attuned to these issues and their overall fiduciary duties. Nonetheless, out of an abundance of caution, we respectfully submit these suggestions. We will be following the progress of the strategic review with intense interest and anticipate a professional process with an economically fair and market driven outcome.

We would appreciate the opportunity to discuss these matters with the independent members of the Board of Directors as soon as possible.

Very truly yours,
David R. Jarvis
Chief Executive Officer
Malcolm F. MacLean IV
President