Hilton selling to Blackstone - Hotel giant agrees to deal for $26 billion

Hilton selling to Blackstone - Hotel giant agrees to deal for $26 billion
By Kathy Bergen, Tribune staff reporter.
Copyright © 2007, Chicago Tribune and The Associated Press
Published July 4, 2007

Hilton Hotels Corp., a global behemoth with a strong presence and long history in Chicago, will be purchased by the Blackstone Group LP in a deal valued at about $26 billion, the companies said Tuesday.

The deal is a testament to the unbridled buying spree sweeping through the private-equity market.

Blackstone, which owns more than 100,000 hotel rooms in the U.S. and Europe, is staking out a much larger footprint in the hotel industry market with this deal, which is due to close in the fourth quarter.

The New York-based private-equity firm said it plans to invest in Hilton and does not anticipate any significant divestitures after the deal, in which it will pay $18.5 billion in cash and assume $7.5 billion of debt.

Beverly Hills-based Hilton, which was headquartered in Chicago earlier in its history, owns, manages or franchises more than 2,800 hotels and 480,000 rooms in 76 countries and territories. Those properties employ 100,000 people.

In Chicago the company owns the Hilton Chicago and the Hilton Chicago O'Hare. In addition it manages the Palmer House Hilton, the Drake and the Conrad, and it operates a host of brands, including Doubletree, Embassy Suites, Hilton Garden Inns, Hampton Inns and Homewood Suites.

In gaining a foothold in Chicago, founder Conrad Hilton bought two stunning Chicago convention hotels, the Stevens Hotel and the Palmer House, in 1945 -- huge deals in their own right.

The Stevens, now the Hilton Chicago, was the largest hotel in the world at that time. Both hotels were among the city's swankiest properties, with ornate lobbies and big ballrooms that played host to the city's movers and shakers.

Thor Equities LLC, a New York developer, bought the Palmer House from Hilton in 2005 for $230 million.

Hilton Hotels, which started in Texas in 1919, was headquartered here for a time, departing for Beverly Hills in the 1950s, according to spokeswoman Kathy Shepard.

"Hilton had a big play and presence in Chicago," said Ted Mandigo, an Elmhurst-based hotel consultant.

The Blackstone deal is reflective of a trend of private equity buying up hotel properties, he noted.

"Absolutely, it's huge," he said.

Hilton's expansion plans, especially in new territories such as India, and the steady stream of fees the company gets for managing franchised properties worldwide, proved attractive to Blackstone, said Jonathan Galaviz, a partner at Globalysis Ltd., a Las Vegas-based consultancy.

"I would expect to see continuing interest from private equity in travel and leisure sector assets as consumer disposable income increases in places like China and India and Baby Boomers here shift to the leisure part of their lives," he said.

Also, hotel properties are proving attractive right now because the high costs for building and land acquisition are putting a damper on new construction, minimizing new competition, Mandigo said.

"And we're still seeing increases in room rates above inflation ... and occupancy remains strong," said Mandigo. "Hotels will be very strong performers, at least in the short term, with good years going out to 2012, which justifies the purchase prices and aggressive acquisition going on."

And sellers are finding better prices in the private market, he said, because stock market investors tend to focus on operations' growth and to overlook real estate appreciation.

The trend raises questions about the ultimate disposition of the Chicago-based Global Hyatt Corp., owned by the billionaire Pritzker family. The family has agreed to break up its empire and split the proceeds among 11 heirs, leading to speculation that the company could be taken public.

"It could be a private deal," Mandigo said, "but I still think the value will be created by a stock deal. That establishes value in the shares."

The company so far has not committed to a course of action.

For Hilton, the Blackstone deal likely will lead to a more aggressive competitive stance, Mandigo said.

"There will be pressure to be more innovative and creative," he said.

Blackstone, whose holdings range from limited service properties such as La Quinta Inns and Suites to LXR Luxury Resorts and Hotels, said it intends to invest in the Hilton properties and brands.

The company said Tuesday it has invested approximately $1 billion in redevelopment capital in its LXR properties over the last three years.

Hilton investors will receive $47.50 a share, or 32 percent more than Hilton's closing price before the announcement Tuesday afternoon. Earlier Tuesday, shares of Hilton has risen $2.18, or 6.4 percent, to close at $36.05 on the New York Stock Exchange.

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kbergen@tribune.com

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Building a hotel empire

Blackstone Group will acquire Hilton Hotels Corp., which owns the Hilton Chicago and manages the Drake Hotel and the Palmer House Hilton in Chicago, in a transaction valued at $26 billion.

1946: Hilton Hotels Corp. is formed and listed on the New York Stock Exchange, with Conrad Hilton as president.

1954: Hilton purchases The Statler Hotel Co.

1964: Hilton International spins off as a separate corporation, with Conrad Hilton as president.

1967: Hilton International is acquired by TWA; Conrad Hilton continues as chairman of the board.

1979: Conrad Hilton dies at age 91; Barron Hilton is named chairman.

1996: Stephen F. Bollenbach is named president and chief executive, becoming the first person in the company's history to hold the title of CEO whose last name is not Hilton. Also, Hilton acquires Bally Entertainment Corp.

1999: Hilton Hotels Corp. acquires Promus Hotel Corp., expanding its brands to include Doubletree, Embassy Suites Hotels, Hampton Inn, Hampton Inn & Suites and Homewood Suites by Hilton.

2006: Hilton Hotels Corp. acquires the lodging assets of Hilton Group PLC, reuniting the brand's international and North American operations.

Source: Hilton Hotels Corp.