Author of www.HotelLawBlog.com
3 July 2007
Hotel Lawyer on THE BIGGEST HOTEL DEAL IN HISTORY. I almost entitled this blog: “‘Paris Hilton, “Get a driver!'”
Fresh out of a jail after serving 23 days of a 45-day jail sentence for probation violation following an embarrassing series of drunk driving and driving without a license offenses, the insolent (now reformed) Paris Hilton should just get a driver. She may not have to worry about the cost anymore! Her Granddaddy’s company has just been sold for $26 billion, and his share is $990 million!
REWIND. Instead, I decided to go with my more usual “hotel attorney and advisor” approach and will lead with this:
As if in a real world re-enactment of the nursery rhyme about 10 little Indians (or the 1945 Agatha Christie movie “Until there were none”*), Blackstone announced today that it is buying Hilton Hotels Corporation in a $26 billion deal. And in case you and Rip van Winkle have just awakened from your slumber, this deal is merely the latest in a long string of huge acquisitions by Blackstone approaching more yhan $100 billion in the last 5 years (including ESA/Extended Stay America for $8 billion, MeriStar for $2.6 billion, La Quinta for $3.4 billion, Wyndham for $3.2 billion, Boca Resorts for $1.25 billion) and by other private equity players such as Morgan Stanley which recently acquired CNL in a then-record-setting $6.6 billion deal only a few months ago.
What’s so important about this acquisition? It portends an unprecedented consolidation of the hospitality industry with potentially staggering consequences to hotel owners, guests, and other stakeholders in the hospitality industry. We will talk about that shortly. It also provides further confirmation of the prediction I made a number of months ago that “the entire industry is now on the block.” Let’s take a further look at the details and background.
Blackstone buys Hilton for “only” $26 billion — THE BIGGEST HOTEL DEAL IN HISTORY.
On July 3, 2007, Blackstone Group and Hilton Hotels Corp. announced the sale of Hilton to Blackstone for $26 billion. This is the biggest acquisition of a hotel company in history.
Blackstone will pay Hilton stockholders approximately $47.50 for each of their shares — a 32% premium over the July 3, 2007 closing price. Barron Hilton, cochairman of the company and son of founder Conrad Hilton, will get approximately $990 million for his 20.8 million shares. Socialite Paris Hilton, recently released from jail after a 45-day sentence for parole violations relating to drunk driving and driving without a license, is Barron’s granddaughter. She won’t have to drive herself anymore, nor do any more reality TV shows.
Founded 88 years ago with a single property in Cisco, Texas and then the first “Hilton” in Dallas, Texas in 1925, Conrad Hilton took the company public in 1946, bought the fabled New York Waldorf=Astoria in 1949, and helped launch the company to its position today with more than 2,800 hotels and 480,000 hotel rooms worldwide.
Key Hilton transactions.
Hilton went public in 1946, but spun off Hilton International with all the foreign assets in 1964. And in 2006, after a number of parries and thrusts, through co-marketing and other arrangements, Hilton bought back Hilton Group Plc for $5.71 billion, finally reuniting the Hilton brand worldwide.
And in 1999, Hilton acquired Promus Hotel Corporation in a major industry acquisition valued at $4.0 billion, that brought Hilton 1,700 hotels with 290,000 rooms, including the Doubletree, Hampton Inn, Red Lion and Embassy Suites brands. This critical acquisition brought Hilton to 1,900 hotels with approximately 350,000 rooms in 50 countries. Prior to the Promus acquisition, Hilton had only 275 owned, managed or franchised hotels, including the New York Waldorf=Astoria, Waikiki’s Hilton Hawaiian Village and Chicago’s Palmer House.
Size does not matter . . . at least in the hotel industry. What does the Hilton-Blackstone deal mean now?
I actually LOVE to say it: “I told you so.”
In my January 29, 2007 blog (“Size no longer matters . . . at least in the hotel industry. Is the entire hotel industry now in play?”) I made a few observations, that I would like to recall here. They are highly relevant to the Hilton-Blackstone buyout and, as a hotel attorney and advisor, they emphasize what I think the Hilton-Blackstone transaction means for the entire hotel industry. Here is what I said on January 29 of this year:
The InterContinental Hotels Group is reportedly in play, and said that “even Hilton is now on the block.”
I mused that “the CNL and EOP deals [are] the harbinger for the entire hotel industry — that every major hotel company could be in play” (citing my contemporaneous January 29 blog about “Two deals that may change the lodging world forever”)
I said, “Here’s why size may no longer impose any limit on acquisitions. . . and why Marriott, Hilton, Starwood, and all the other hotel companies could be up for grabs.” And those reasons are more valid today (if possible) than in January.
John V. Arabia, a Principal of Green Street Advisors, one of the most highly respected analysts covering lodging, said that until recently, the larger hotel companies, including both the large hotel C-Corps and REITs, were generally considered too big to be acquired by private equity firms despite their strong interest in the lodging sector.
The Blackstone-EOP deal at almost $50 billion was (in January) the largest private equity buyout in history.
By comparison, the largest hotel C-Corps — such as Starwood, Marriott and Hilton — each have total enterprise values ranging from “only” $18 to 30 billion, while Host Hotels, the largest hotel REIT, has assets valued at roughly $20 billion.
While size may matter to some, size no longer seems to be a deterrent to taking the large public hotel companies private given the flood of capital currently being raised by private equity firms.
The $100 billion barrier is broken.
Then in April, after the Royal Bank of Scotland Group Plc announced its bid to buy ABN Amro Holdings for US$103 billion (76 billion euros), the cherry was broken on the fabled “$100 billion barrier.” Nothing was “too big” any more. (See, “Hotel Financing looking at a new benchmark — The $100 billion deal.”)
I noted in my April 25, 2007 blog that no company in the hotel industry is worth more than the Equity Office deal completed earlier this year. Although the Royal Bank of Scotland bid for ABN Amro does not involve any hotels, raising capital is something a commodity business — it does not matter what the capital is for; the capital raising machine has surpassed all the old limits. Anything could be next. And this deal is bigger that the total value of the entire hotel industry.
Why are hotels so popular?
OK. There are almost unlimited amounts of capital looking for a “home” or place to invest. And the private equity capital is now being put together in amounts previously unimaginable. So the private equity guys could buy all the hotel companies if they wanted to. But why would they bother?
The short answer is that the lodging industry has experienced record profit growth the past three or four years, and cap rates — although near historic lows for the hospitality industry — still look very attractive compared to other real estate types and other industries.
This means that hotel companies and hotel properties appear to be a bargain to private equity investors.
John Arabia describes this as “the current disconnect between public and private pricing for hotel real estate.” John notes that on average, public hotel REITs have recently traded at high-single-digit to low-double-digit discounts to Net Asset Value (NAV). That means that private-market hotel buyers are willing to pay more for properties than institutional investors in public hotel REITs. That is likely to lead to more private equity leveraged buyouts.
Earlier this year, Christopher J. Nassetta, President and CEO of Host Hotels & Resorts, said it slightly differently. Commenting on the CNL and EOP transactions, he said, “There is a fundamental mismatch of valuations in public and private markets. You are seeing transactional activity that rationalizes this mismatch.”
Everyone in the hospitality industry is on the auction block!
So is everyone really on the block?
YES! YES! YES!
What are the implications?
There are a number of important implications. What’s most important to you?
With her grand father getting $990 million from the deal, Paris Hilton probably won’t have to sell or mortgage her inheritance to hire a driver and avoid future drunk driving charges . . . if she gets anything from the estate at all . . . but that is another story . . .
Blackstone has gobbled up almost $100 billion in hotel assets over the past 5 years, and the rest of the hotel industry may be Blackstone’s (or some other private equity player’s) dessert . . .
China now owns a piece of Hilton through its recent investment in Blackstone (China bought close to 10% of the recent Blackstone offering) . . .
Blackstone has acquired assets including
Other equity funds such as Morgan Stanley and Goldman Sachs seem to like hospitality too, with recent acquisitions including CNL for $6.6 billion.
As I said in January, with values based on market capitalization, there is no C-Corp hotel company (Marriott, Hilton, Starwood, Hyatt, InterContinental . . . ) with a value greater than $20-30 billion, and even Host Hotels, the largest REIT has a market cap of only $20 billion or so.
WHAT HAPPENS WHEN ALL OF THE MAJOR HOTEL BRANDS ARE OWNED BY ONE OR TWO OWNERS?
Are the new owners really long term owners or just “financial wizards” ready to dismantle and sell the pieces?
What does this all mean?
The concentration issue is a big one. Will there be only one or two hotel companies to negotiate your management or franchise agreement with? Is there any competition to keep hotel rates fair for consumers? Will hotels be able to maintain quality standards for their brands or will MBAs be using their HP calculators to determine how much quality they can afford to deliver for the investment?
Have you noticed how hotel prices and rates seem to go up after every billionaire or equity fund buys it — presumably to justify the latest outrageous price paid for the property? Have you worried about how the big buyers don’t seem to invest any money to update or maintain the property where they just doubled the rates?
Dismantling the industry? But more than that, a lot of players have claimed they were buying a company for “long term investment” — as has Blackstone on the purchase of Hilton. To some, this sounds like a classic car buyer purchasing a fine, vintage automobile to own “forever”, which he then dismantles to sell by the part — wheels, carburetor, hood ornament, doors, and the like — piece by piece.
That’s what some think happened to Hilton’s purchase of Promus with the rearrangement of Hiltons and Doubletrees, the sell off of Red Lion and other “repositionings” or the dismantling of Wyndham by Blackstone after its purchase last year.
There will be lot more on this deal and these issues in the near future. The industry is in play. We have heard rumors about Marriott, Starwood, InterContinental, Orient Express, Strategic Hotels, Host and a lot more. The industry still looks cheap to abundant capital.
We will see how it plays out.
This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We’ve done more than $50 billion of hotel transactions and more than 100 hotel mixed-used deals in the last 5 years alone. Who’s your hotel lawyer?
* In the Agatha Christie classic, “Then there were none,” 10 people are invited for a weekend on an island by a Mr U. N. Own, but he isn’t on the island. At dinner a record is played, by which all the people are accused of murder. Suddenly the first of them is dead, then the next… And just as it seems clear that that one of them is the murderer, that suspect person is always the person murdered next. At last only two people seem to be left. . . until . . .
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 email@example.com 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. In the last 5 years alone, Jim and his team have assisted clients with more than 100 hotel mixed-use projects, all of which have involved at least some residential, and many have also involved significant spa, restaurant, retail, office, sports, and entertainment components — frequently integrated with energizing lifestyle elements.
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 firstname.lastname@example.org or 310.201.3526. For his views on current industry issues, visit www.HotelLawBlog.com.