Blackstone Acquires Hilton

The end of 2007 may mark the end of an era for the hotel industry. If the deal closes on schedule in the fourth quarter as expected, The Blackstone Group's proposed US$26 billion acquisition of Hilton Hotels Corp. will give the New York-based equity fund a blended portfolio of more than 580,000 rooms-enough to make it the largest hotel company in the world.

By Staff -- HOTELS Magazine, 8/1/2007

The Hilton Hefei in China opened in February and represents a big growth market for the brand.

BEVERLY HILLS, CALIFORNIA The

end of 2007 may mark the

end of an era for the hotel

industry. If the deal closes on

schedule in the fourth quarter

as expected, The Blackstone

Group's proposed US$26

billion acquisition of Hilton

Hotels Corp. will give the

New York-based equity fund

a blended portfolio of more

than 580,000 rooms-enough

to make it the largest hotel

company in the world.

Hilton's board of directors

already has given its blessing

to Blackstone's US$47.50

share offer, a move that

hardly came as a surprise

since it represented a 40%

premium over the previous

day's close. Now, it is up

to Hilton's shareholders to

decide whether Blackstone's

offer represents the best

return on investment and the

brightest future for Hilton and

its nine-brand family.

Blackstone's ownership

likely would ensure the big

get bigger. "It's hard to imagine

a better strategic fi t for us

than Hilton. This transaction

is about building the premier

global hospitality business,"

said Jonathan Gray, a senior

managing director at Blackstone,

in a prepared statement.

"We are committed to investing

in the company and working

with Hilton's outstanding

owners and franchisees to

continue to grow and enhance

the business."

Standard & Poor's reports

that Hilton's pipeline should

see 250 hotels and more than

35,000 rooms joining Hilton's

system this year. Research

from analysts such as

Wachovia's Jeffery Donnelly

suggests Blackstone would

accelerate that pace going

forward. Blackstone has the

track record to prove it can.

Already the largest private

equity fund investors in the

hotel sector worldwide, the

group has grown La Quinta

Inns & Suites 45% since

its acquisition in 2006 and

poured more than US$1

billion in redevelopment

capital to nurture its own

LXR luxury resorts brand.

This deal would give

Blackstone international

scope for playing the growth

game, a key factor in rationalizing

that 40% premium.

"Hilton has huge growth

prospects in Asia and Europe

with both its full-service and

select-service brands, but

even domestically Hilton still

has signifi cant expansion

opportunity," says Stephen

Hennis, managing director,

Hospitium consulting fi rm.

"Homewood Suites and

Hilton Garden Inn brands are

still in their infancy compared

to their archrivals Residence

Inn (525 versus 196) and

Courtyard (739 versus 309),"

says Hennis, who contends

that the infrastructure already

exists to support more hotels.

Virtually any additions to

Hilton's pipeline will be

accretive to earnings. "By

going private, Hilton will be

able to shift its efforts from

meeting analyst expectations

to focusing on the growth of

its brands," Hennis adds.

All sides have a lot to gain

in the deal: Blackstone will

gain a huge operating platform

and a loyal customer base with

the HHonors program that

will benefi t the existing hotels

in its portfolio; Blackstone

already owns a fair amount

of Hilton properties through

its other acquisitions such

as MeriStar and Wyndham;

Hilton's shareholders are

being bought out at a huge

premium; and Hilton's

management no longer needs

to adhere to public scrutiny

and analyst oversight.

Hilton will gain some

big additions in the luxury

sector, boosting its presence

against Four Seasons, Ritz-

Carlton and Starwood's St.

Regis and Luxury Collection.

Blackstone's LXR portfolio,

primarily composed of Boca

Resorts, Wyndham's luxury

properties (mostly the Carefree

Resorts portfolio Patriot

American acquired in the prior

deal cycle), and their recently

launched London brand, will

add to Hilton's growing Conrad

Hotels & Resorts and its

Waldorf=Astoria Collection.

"This will fi nally give

Hilton the broader luxury

identity that it has lacked for

years," Hennis says. If there

is some over-crowding, it

may be in the middle tier,

with Hampton Inns & Suites

and Hilton Garden Inn

jostling with La Quinta and/or

with Hilton's Doubletree.