The Blackstone Group's pending acquisition of Hilton Hotels Corp. will remove yet another L.A.-area company from the public markets while divesting the colorful Hilton family of its ownership stake.
But that doesn't mean the iconic Hilton name will fade from the hospitality industry or Los Angeles.
The $26 billion cash-and-debt deal appears poised to further expand the Hilton name around the world. And unlike the typical strategic buyer, Blackstone is expected to keep Hilton's operational headquarters in Beverly Hills.
"Blackstone looked at Hilton and saw a great compliment of brands, very attractive owned real estate, a great platform to expand overseas and a number of intangible assets that (public) investors don't value as highly," said Jeffrey Randall, an analyst with A.G. Edwards & Sons.
Blackstone, whose real estate investments have included some of Los Angeles' largest office buildings, began investing in the hotel-resort industry in 2004. Thus, its bid for Hilton is unlike the typical highly leveraged private equity deal where the new owner sells assets to pay debt.
Indeed, the New York-based private equity firm has suggested that it may convert some of its own hotel properties to the Hilton flag, and that it also intends to leverage its financial flexibility to acquire or develop new properties.
And while Blackstone's bid of $47.50 per share raised eyebrows because of its 40 percent premium, analysts say naysayers are undervaluing the strategic assets that Hilton brings to the table.
Since the dual blow of the tech downtown and the Sept. 11, 2001 terrorist attacks, the hospitality industry has turned the corner worldwide and Hilton has been among the strongest performers. In 2006, the company reported net income rose 24 percent to $572 million, on a 58 percent jump in revenues to $1.3 billion.
Unlocking Hilton's assets
Blackstone has more than 100,000 rooms in the U.S. and Europe and Hilton manages or franchises 485,000 rooms in more than 80 countries. The marriage will create one of the largest and most diverse hospitality management companies in the world.
Blackstone's hotel properties include La Quinta Inns and Wyndham International. Hilton's brands range from the mid-priced Hampton Inn to the exclusive Waldorf-Astoria Collection, with flagship Hilton hotels forming the core of the company.
Blackstone is expected to convert some of its properties to a Hilton brand and take advantage of Hilton's superior information technology systems, including the Hilton Honors customer loyalty program that encourages travelers to stay within the Hilton family for both business and leisure travel.
Blackstone is "a sophisticated real estate player with a long-established track record," Hilton Chief Executive Steve Bollenbach put it during a July 5 conference call. Blackstone did not return calls for comment.
For the Hilton executives who stay on, going private will enable them to make more strategic investments, particularly overseas, without having to worry about the quarter-to-quarter earnings calls.
In early 2006, Hilton became the industry's third largest hotel chain by revenue after the $5.7 billion repurchase of Hilton International, which had been broken off from the company in 1987. Since then, Hilton has worked on expanding its mid-price brands to Europe, including a recent announcement that it intends to open more Hampton, Doubletree, Hilton Garden Inn and Hilton properties in the U.K.
At the same time, Hilton has increasingly focused on growing revenue through the management or franchise fees it charges to hotels owned by others. Since 2005, Hilton has sold around $4.8 billion in hotel and other properties, but has hung on to key "brand-building" facilities such as its crown jewel, the Waldorf-Astoria.
It's clear, though, that the sale will mean the end of the historic involvement in the company by the Hilton family, the company's second-largest shareholder with 5.3 percent of outstanding shares. That stake is now worth around $990 million under the Blackstone deal.
The Hilton hotel chain was founded in 1919 by Conrad Hilton, the great-grandfather of Hollywood celebutante Paris Hilton. Conrad Hilton's surviving son, 79-year-old Barron Hilton, still reports to work each day at Hilton's corporate headquarters, but shares the title of chairman with Chief Executive Bollenbach, a veteran company executive.
And even before the Blackstone deal was announced, Bollenbach has said he would retire at the end of this year, and was to be succeeded by Matthew Hart, who is not a family member and is now president and chief operating officer. It's unclear what Hart's role will be now following the acquisition.
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