Blackstone buys Hilton hotels for $26bn

by Reuters on Wednesday, 04 July 2007

US private equity firm Blackstone Group agreed on Tuesday to buy Hilton Hotels for around $26 billion, the biggest in a series of recent private equity offers for hotel companies.

Under terms of the agreed deal, Blackstone will pay $47.50 for each share of Hilton, one of the most prominent global hotel brand names, and take on debt.

That's a 32% premium over Tuesday's closing price. Ahead of the post-close announcement, shares of Hilton had risen 6.4% to close at $36.05 on the New York Stock Exchange.

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Options volatility and volume in Hilton stock was well above average before the close of trade on Tuesday, said Paul Foster, an options strategist at theflyonthewall.com.

Blackstone, which raised $4.1 billion in an IPO late last month, said it intends to invest in the Hilton properties and brands globally to grow the business.

The hotel industry is enjoying a multiyear boom as robust demand has allowed hoteliers to steadily raise rates. The upbeat market environment, supported by limited construction of new hotels, has made lodging assets hot commodities.

Hilton is worth $20.1 billion, based on 424 million shares on a diluted basis at the end of March at the price Blackstone is paying. Hilton said it had more than $7 billion of debt in its January-March quarterly results.

A spokesman for Blackstone said the group was not revealing the debt and equity portion of the deal at this stage.

Many investors think the notoriously cyclical US hotel industry has more room to grow and could provide risk-adjusted returns that outperform other asset classes, according to Thomas Callahan, an analyst with hospitality industry tracking firm PKF Consulting in San Francisco.

"The perspective is that the industry still has a few more good years left in this upturn that began - depending on how you count it - several years ago," Callahan said.

Blackstone already has a significant portfolio of hotel and resort properties that includes more than 100,000 hotel rooms in the United States and Europe. Its properties include La Quinta Inns and LXR Luxury Resorts and Hotels.

Hilton's brands include Hilton, Conrad Hotels & Resorts, Doubletree, Embassy Suites, Hampton Inn, Hilton Garden Inn, Hilton Grand Vacations, Homewood Suites by Hilton, and The Waldorf-Astoria Collection.

The Hilton chain was founded in 1919 by Conrad Hilton, the great-grandfather of US celebrity socialite Paris Hilton.

Her grandfather Barron Hilton, co-chairman of the Hilton board of directors, owns 5.3% of Hilton shares, according to the company's April proxy. He is the brother of the late Conrad Nicholson Hilton Jr, called Nicky, who was the first husband of actress Elizabeth Taylor.

The deal is expected to close during the fourth quarter of this yearand was approved by Hilton's board of directors on Tuesday, the company said.

Blackstone said it expected no significant divestitures as a result of the transaction.

So far this year, several private equity groups have made multibillion-dollar offers for hotel assets.

Investors believe the limited supply of new hotel rooms in key markets means they can achieve higher returns by buying and investing in existing hotels, said Joseph Toy, president of Hospitality Advisors LLC in Honolulu.

"The game here is acquire at a premium, then renovate and reposition," Toy said. "And with capital as abundant as it is, it's something we're seeing across the market, including Hawaii."

Last month, Goldman Sachs' real estate fund, Whitehall, said it would buy Equity Inns, a mid-market hotel chain, in a deal worth $2.2 billion including assumed debt.

Also in June, Legacy Hotels Real Estate Investment Trust, the biggest lodging REIT in Canada, said it was in talks with investment groups over a possible takeover and had received nonbinding offers valuing its equity at $1.36 billion.

In February, luxury hotel operator Four Seasons Hotels agreed to a $3.37 billion takeover offer from a group that included Bill Gates' Cascade Investments and Saudi Prince Alwaleed bin Talal.

In January, a unit of Wall Street investment bank Morgan Stanley said it would buy privately held REIT CNL Hotels & Resorts in a transaction worth $6.6 billion.

Hilton said last month that it had a letter of understanding with Somerston Hotels UK to develop new hotels in the UK.

The hotel workers union Unite Here applauded the proposed Blackstone deal on Tuesday, saying it enjoys a "positive partnership" with Hilton and that Blackstone "has demonstrated its commitment to fair treatment" for workers.

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