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It might take 10 years for Blackstone to reach the top of the market and then exit |
Under the terms of the agreement, Blackstone will acquire all the outstanding common stock of Hilton for $47.50 a share, a premium of 40% over the closing price of $33.87 on July 2. This will leave Barron Hilton, the son of the founder Conrad Hilton, who holds 5.3% of the shares, with a $990 million payout.
The board of directors approved the transaction on July 3 and the transaction is expected to close in the fourth quarter, subject to shareholder approval. The deal has received financing commitments from Bear Stearns, Bank of America, Deutsche Bank, Morgan Stanley and Goldman Sachs.
This acquisition brings Blackstone to a total of 560,000 hotel rooms in 76 countries, with new hotel brands joining the group including Doubletree, Embassy Suites, Hampton Inns, Homewood Suites and The Waldorf-Astoria Collection. Blackstone already owns La Quinta Inns and LXR Luxury hotels and resorts. Once this deal closes, Blackstone will have control over 15 hotel brands.
The emphasis on brand acquisition has been at the forefront of this deal. "This deal is not about just the real estate assets that the equity group are acquiring. I think what has made this deal really interesting to Blackstone is because they will own the Hilton brand," says Bruno Courtin, analyst at Paris-based MKG Consulting. Another analyst speculated that Blackstone might use the Hilton brand to promote new assets or totally re-brand the whole hotel chain.
In contrast to its purchase of Equity Office Properties Trust where it has already begun to sell off assets piecemeal, Blackstone views Hilton as an important strategic investment with no significant divestitures envisaged in the near term.
"As and when Blackstone comes to exit from this strategy there could be a problem," remarks Courtin. "They are going to try to sell it at the top of the market, which could be up to 10 years away, but these assets are getting bigger and more and more expensive. Only a few players could be potential buyers and they are likely to buy sooner rather than later, if at all."
However, Hilton is a very powerful brand, especially to such players as Marriott or Accor. That means there is a chance that when Blackstone comes to sell, one of those groups will be willing to pay the maximum price, adds Courtin.
Value in hotel assets
According to Jones Lang LaSalle Hotels, $70 billion of hotel deals closed last year, and in 2007 deal volume has greatly expanded. "At the moment I think several players are wanting to look at this side of the market – they are buying into a trend that I think is making the hotel industry able to create more value than other real estate related deals," says Georges Panayotis, chairman of MKG.
Deal flow from the hotel sector demonstrates that buyout firms are still confident about debt financing and the value held in the hotel industry. "This industry is the perfect industry for private equity to look at – the market is linked to world wealth and that is growing all the time. The hotel industry is a perfect target for these investors," says Courtin.
However, one factor preying on some investors’ minds is rising interest rates. Although the hotel market is not as sensitive to these as the rest of the real estate market, hotels can only increase room rates to a limited extent to combat rising costs. These concerns aside, hotels still look cheap relative to other real estate assets. Pennsylvania-based Susquehanna Financial Group observed in a July research note that investors see hotels as a risk-adjusted bargain relative to office buildings, shopping malls and apartment buildings.
Enthusiasm for commercial mortgage-backed securities has given investors unprecedented access to cheap debt – lifting leverage levels and prices paid per square foot for properties. In the past couple of months, however, lenders have become more selective amid wider concern about debt quality triggered in part by the sub-prime mortgage crisis. Irrespective of these concerns, buyouts might still prove increasingly likely for those companies able to utilize real estate debt markets.
Who’s next?
"Starwood looks a whole lot like Hilton," says Courtin. "In terms of size and composition, Starwood Hotels is a likely next target, with players like InterContinental potentially looking to buy."
The market reflected this sentiment, with Starwood shares rising 8% in one day soon after the Blackstone deal was announced. The InterContinental Group has also seen share increases of around 4% after the announcement. Marriott International has also been named as another likely target even though its 75-year-old chairman and CEO, Bill Marriott, shows no signs of wanting to sell.