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Two deals that may change the lodging world forever.

Author of
28 January 2007
Hotel Lawyer on hotel finance. History is being made. The biggest leveraged buy out ever keeps getting bigger. Sam Zell has orchestrated an auction for his Equity Office Properties. And the latest bid from the Blackstone Group is $54 per share, bringing the deal value to $38.3 billion and topping the prior bid from Vornado.

At the same time, one of the biggest hotel deals in history — perhaps small change compared to the Equity Office Properties deal but very significant in its own way — has been announced with the $6.6 billion acquisition of CNL Hotels & Resorts by Morgan Stanley and the contemporaneous spin off of $2.4 billion of hotel assets to Ashford Hospitality Trust Inc.

How could these two transactions affect the lodging world, and what is the impact beyond the immediate transactions themselves?

Is private equity forcing a major paradigm shift?

I believe that the Equity Office Properties (EOP) and CNL Hotels & Resorts (CHL) transactions represent a paradigm change that could forever change the lodging world or at least profoundly affect the players sitting at the tables.

It was not long ago that an acquisition of a “few hundred million” was a huge undertaking. A billion dollar deal was remarkable.

Now we have a $6.6 billion deal for the second largest hotel REIT. And although the EOP deal sets the new benchmark, I suspect it is only a precursor of much more to come, where deals may soon top $100 billion, making even the largest U.S. companies — much less the largest hotel companies — targets for the private equity funds.

Let’s look at this phenomenon in more detail — first the details of the immediate transactions, and then the implications for the lodging industry.

The CHL Transaction

CNL Hotels & Resorts (CHL) is the second largest hotel REIT in the United States, and owns one of the most distinctive portfolios of luxury and upper-upscale lodging properties. On January 19, 2007, CHL announced execution of a definitive agreement to be acquired by Morgan Stanley Real Estate at a price of $20.50 for approximately $6.6 billion for all company’s outstanding stock.

In connection with this transaction, CHL contemporaneously announced the sale of 51 hotel properties to Ashford hospitality trust for approximately $2.4 billion, immediately prior to the Morgan Stanley transaction.

This leaves Morgan Stanley Real Estate with eight iconic luxury properties including the Grand Wailea Resort in Maui, La Quinta Resort and Club in La Quinta, California and the Arizona Biltmore Resort in Phoenix, Arizona.

Prior to this transaction, CHL agreed to sell 32 assets to a Whitehall Street Global Real Estate affiliate for $405 million, a deal that is scheduled to close in the first quarter of 2007.

This is obviously a significant transaction for the participants — Monty J. Bennett, Ashford’s president and chief executive, described it as a “transformational investment.” And certainly this major acquisition of one of the largest hotel REITs will have some immediate impact on the hotel industry. (Who hasn’t dreaded bidding on an asset or portfolio against CHL, which has one of the lowest costs of capital in the industry?)

But I predict that this is just the precursor or harbinger of things to come, and presages a new flood of private equity into the lodging sector in search of yield and value.

In order to better understand the potential, let’s take a quick look at the EOP transaction — a deal outside the hospitality industry, but instructive on the seemingly unlimited ability of private equity funds to raise capital.

The EOP Transaction

Equity Office is the juggernaut created by the legendary Sam Zell. It is the largest landlord in the U.S., owning more than 600 buildings across the country.

On November 19, 2006, Equity Office agreed to sell itself to a Blackstone affiliate for $48.50 per share or about $19 billion, plus $16 billion in debt assumption.

Then in January 2007, a group led by Vornado Realty Trust and including Barry Sternlicht’s Starwood Capital, made an informal bid for EOP at $52 a share (60% in cash and 40% in stock), and EOP gave the competing group due diligence access and a short deadline for making a formal offer.

However, in a preemptive move, on January 25, 2007, Blackstone increased its all-cash offer from $48.50 a share to $54 a share, or a total price of $38.3 billion — the world’s biggest leveraged buyout. This is an 11% increase from Blackstone’s prior offer and a 20.8% premium to the EOP stock price prior to the initial deal announcement. In exchange for its increased bid, Blackstone got a bigger “breakup fee” if EOP chooses another bidder — a $500 million breakup fee (up from “only” $200 million).

The shares last closed at $55.22, apparently on speculation that the Vornado-Starwood group will go even higher.

What are the implications of these two deals for the hospitality industry?

The CNL Hotels & Resorts and Equity Office Properties transactions suggest that private equity funds can do a deal of almost any size. In fact, on January 26, 2007, just after making his record-setting $38.3 billion bid for EOP, Stephen A. Schwarzman, the chairman of the Blackstone Group, spoke at the World Economic Forum in Davos, Switzerland.

His panel? It was called “Is bigger better in private equity?”
It is no secret that the big private equity firms have hundreds of billions of dollars to invest. And these recent transactions suggest, as the New York Times recently mused, that “perhaps even $100 billion companies . . . may soon lose their ticker symbols.”

At the Davos World Economic Forum attended by Schwarzman, it was noted that private equity had accounted for 20% of the merger and acquisitions in 2006, but 64% of the forum participants expected private equity to account for more than a quarter of the M&A activity in 5 years — perhaps up to a third or more.

Industry experts are having heated conversation about private equity’s insatiable quest for yield and value and its inevitable impact on the hospitality industry. Some are wringing their hands and others are clapping – but all are fascinated. I will share with you comments of some of those experts soon, as we follow this important trend.


Our Perspective.
We represent developers, owners and lenders. We have helped our clients as business and legal advisors on more than $50 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at or 310.201.3526.

Jim Butler is one of the top hotel lawyers in the world. GOOGLE “hotel lawyer” or “hotel mixed-use” or “condo hotel lawyer” and you will see why.

Jim devotes 100% of his practice to hospitality, representing hotel owners, developers and lenders. Jim leads JMBM’s Global Hospitality Group® — a team of 50 seasoned professionals with more than $50 billion of hotel transactional experience, involving more than 1,000 properties located around the globe.

Jim and his team are more than “just” great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them. They are a major gateway of hotel finance, facilitating the flow of capital with their legal skill, hospitality industry knowledge and ability to find the right “fit” for all parts of the capital stack. Because they are part of the very fabric of the hotel industry, they are able to help clients identify key business goals, assemble the right team, strategize the approach to optimize value and then get the deal done.

Jim is frequently quoted as an expert on hotel issues by national and industry publications such as The New York Times, The Wall Street Journal, Los Angeles Times, Forbes, BusinessWeek, and Hotel Business. A frequent author and speaker, Jim’s books, articles and many expert panel presentations cover topics reflecting his practice, including hotel and hotel-mixed use investment and development, negotiating, re-negotiating or terminating hotel management agreements, acquisition and sale of hospitality properties, hotel finance, complex joint venture and entity structure matters, workouts, as well as many operating and strategic issues.

Jim Butler is a Founding Partner of Jeffer, Mangels, Butler & Marmaro LLP and he is Chairman of the firm’s Global Hospitality Group®. If you would like to discuss any hospitality or condo hotel matters, Jim would like to hear from you. Contact him at or 310.201.3526. For his views on current industry issues, visit