UPDATE 1-Starwood consortium to invest $905 mln in Extended Stay

* Says valued Extended Stay at $3.9 bln

* Says Extended Stays debt to be reduced to $2.8 bln

March 18 (Reuters) - A group led by Starwood Capital has agreed to invest up to $905 million in Extended Stay America [ESAIN.UL], as part of a reorganization proposal to bring the hotel chain out of bankruptcy protection.

Starwood said it filed its proposal with the bankruptcy court earlier on Thursday and values Extended Stay at about $3.9 billion.

"As part of the agreement, the consortium would invest $450 million of equity directly into Extended Stay and has also agreed to backstop a $200 million equity rights offering, thereby infusing $650 million of new capital into the company," Starwood said in a statement.

In addition, the consortium will commit $255 million to provide a cash alternative for creditors who prefer cash to the equity they would receive as part of the plan of reorganization.

Starwood said Extended Stay's debt would be reduced to $2.8 billion from $7.4 billion.

Under the new plan, Starwood would become the "stalking horse", or lead bidder at a court supervised auction for the assets. Its bid could still be topped.

Holders of Extended Stay's $4.1 billion mortgage would receive a $200 million cash pay down, a new $2.8 billion mortgage and $471 million of equity in the reorganized compay under Starwood's proposed plan.

Junior mortgage certificate holders and holders of the company's $3.3 billion mezzanine debt will get junior equity interests in Extended Stay.

Extended Stay was bought in June 2007 by an investor group led by David Lichtenstein's Lightstone Group. It was forced into bankruptcy last year after its projected cash flows declined amid the recession and it could not keep servicing more than $7 billion in debt.

The company, which runs over 650 hotels, said earlier this month that it could emerge from bankruptcy protection as soon as June under a plan backed by investors Centerbridge Partners L.P. and Paulson & Co Inc, in exchange for the private equity firms getting a 22.5 percent stake in the reorganized company.

Centerbridge and Paulson had proposed to invest $450 million in Extended Stay.

The case is In re: Extended Stay Inc, U.S. Bankruptcy Court, Southern District of New York, No. 09-13764. (Reporting by Santosh Nadgir in Bangalore; Editing by Jarshad Kakkrakandy)