News for the Hospitality Executive
|By Jim Butler, Hotel Lawyer | Author of www.HotelLawBlog.com
3 July 2007
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 $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 record-setting $6.6 billion only a few months ago.
What's so important about this acquisition? It portends and 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, co-chairman 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:
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?
YES! YES! YES!
What are the implications?
There are a number of important implications. What's most important to you?
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 $40 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 . . .
|Also See:||The Blackstone Group Now Controls 1,430 Hotels; Some Speculate Blackstone Preparing an Initial Public Offering / February 2006|
|MeriStar Hospitality Agrees to be Acquired by The Blackstone Group in Transaction Valued at Approximately $2.6 billion / February 2006|
|The Lightstone Group to Acquire Extended Stay Hotels (683 properties) from the Blackstone Group for $8 Billion / April 2007|
|The Blackstone Group to Acquire Boca Resorts in Deal Valued at $1.25 billion, including Debt / October 2004|
|With Acquisition by Blackstone Group Complete, La Quinta Management LLC Plans to Focus on Corporate Owned Hotels, Will Convert About 100 Baymont Hotels to La Quinta and Sell Baymont Flag / March 2006|
|Blackstone Real Estate Advisors Combines 14 Wyndham Properties with Seven Other Owned Hotels to Form the LXR Luxury Resorts Brand / August 2005|