Investment house to buy Hilton Hotels

By Kimi Yoshino, Tom Petruno and Roger Vincent

July 4, 2007 12 AM PT

Times Staff Writers

One of the oldest and most storied operators in the hotel business, Beverly Hills-based Hilton Hotels Corp., agreed Tuesday to a takeover by corporate buyout giant Blackstone Group.

The $26-billion deal would put the world’s fourth-largest hotelier under the control of financiers who have led the privatization wave that has swept corporate America in the last two years.

The proposed purchase reflects the enormous and growing profitability of the hospitality industry, which has been booming worldwide with the surging global economy. Hotel companies, enriched by strong bookings and rising room rates, have embarked on major expansions in the United States and abroad.

“The hotel business has been in a positive perfect storm, coming back from the terrible events of 9/11,” said investment banker Donald Wise of Irvine-based Johnson Capital. “Profits have been at record levels for the past several years.”

Hilton co-Chairman Stephen F. Bollenbach said the company’s expansion prospects were “terrific” before joining with Blackstone. Now, “We will have a better opportunity in terms of growth,” he said.

Blackstone indicated that it was drawn to Hilton by the scope of its operations.

Hilton last year repurchased Hilton International, which it had sold in 1964, and earlier this year announced plans for dozens of new hotels in China, Russia and Central America.

Hilton, founded in 1919 by Conrad Hilton with one hotel in Cisco, Texas, now operates 480,000 rooms in 2,800 hotels in 76 countries. Its brands include Hilton, Conrad Hotels, Doubletree, Hampton Inns and its marquee Waldorf-Astoria properties.

Although the Hilton family name is on the door and Conrad Hilton’s son Barron Hilton, 79, is co-chairman, the family owns less than 6% of the stock in the firm, which has been publicly traded since 1946. Celebutante Paris Hilton is the great-granddaughter of Conrad Hilton.

The 20.8 million shares controlled by Barron Hilton will be worth $990 million if the deal is approved by shareholders.

Blackstone is one of the biggest names in the corporate buyout business and just sold shares in itself to investors last month. It already is a substantial player in hotels, owning more than 100,000 rooms in the U.S. and Europe, including the La Quinta Inns chain, and the Golden Door spa in San Diego County as well as the Boulders Resort and Golden Door Spa in Arizona.

“It is hard to imagine a better strategic fit for us than Hilton,” Jonathan Gray, a senior managing director at New York-based Blackstone, said in a statement. “This transaction is about building the premier global hospitality business.”

Blackstone agreed to pay $47.50 a share in cash for Hilton, a 40% premium to the stock’s closing price Monday. The stock jumped $2.18 to close at $36.05 on Tuesday before the deal was announced.

In part, the deal may be about real estate opportunities, some analysts said. Hilton owns some choice properties, including the historic Waldorf-Astoria in New York and the Hilton Hawaiian Village Beach Resort and Spa in Honolulu. But the majority of its hotels are franchised and the company has been actively selling its land and buildings since 2005 to focus instead on management and operations of the hotels.

Blackstone is a major owner of commercial real estate. In a landmark deal this year, it bought Equity Office Properties Trust, the largest office landlord in the country, for $23 billion.

Often, corporate buyout targets have been companies that can be restructured via cost cutting or dismantling to sell off pieces at a profit. Buyout firms often look to resell their companies within a few years.

Blackstone in April agreed to sell its 683-unit Extended Stay hotel chain for $8 billion, three years after buying the business.

But in a joint statement announcing their deal, Blackstone and Hilton said that “Blackstone views Hilton as an important strategic investment; no significant divestitures are envisaged” as a result of the deal.

Blackstone “intends to invest in the Hilton properties and brands globally to enhance and grow the business for the benefit of owners, franchisees and customers,” the companies said.

“I think it’s safe to say, in every regard, things will be better,” Bollenbach, 64, said. “From a guest standpoint, they should see no changes.”

Bollenbach had already planned to retire at year-end. He could not say whether company President Matthew J. Hart would succeed him as chief executive, as previously announced.

Although corporate takeover activity in general has mushroomed this year, Hilton had not been rumored to be a buyout candidate. At Monday’s closing price its stock was down slightly year to date.

The lack of movement in the shares may have made the Blackstone bid more appealing.

Bollenbach said he considered the Blackstone offer “a healthy premium.”

“That’s what makes this so compelling,” he said. “It makes us happy and anxious to recommend this to the shareholders.”

Stock analyst Craig Silvers of Bricks & Mortar Capital said Hilton stock was regarded as undervalued, “but few thought it was undervalued that much. It’s a very good price for shareholders.”

The deal could herald a new rush in takeover activity in the hotel industry. Heavyweights Marriott International Inc. and Starwood Hotels & Resorts Worldwide Inc. could be targets, analysts said.

“Unprecedented amounts of capital have been aggregated in the hands of private equity guys,” Los Angeles real estate attorney Jim Butler said. “What was previously unthinkable is happening before our eyes” in terms of corporate buyouts.

Over the years, Hilton has made its mark on the lodging industry. In 1959, it pioneered the “airport hotel” concept with the San Francisco Airport Hilton. And in 1970, it purchased two major properties in Las Vegas -- which it renamed the Las Vegas Hilton and the Flamingo Hilton -- becoming the first New York Stock Exchange-listed company to enter the domestic gambling business. It spun off its casino operations in 1998.

In 1999, Hilton spent $3.7 billion to acquire the Doubletree, Embassy Suites, Hampton Inn, and Homewood Suites brands.

Last year, Hilton earned a record $572 million on sales of $8.2 billion. It has about 100,000 employees.

A Hilton spokeswoman said there were no plans to relocate the headquarters from Beverly Hills, where the company has been based since the 1950s.

Hilton would join a diverse stable of Blackstone-owned companies including retailer Michaels Stores Inc., Freescale Semiconductor Inc. and sock maker GoldToe-Moretz.

Buyout firms such as Blackstone are funded by big-money investors including pension funds and wealthy families, and by loans from major banks and brokerages. The Chinese government is one of Blackstone’s newest investors, acquiring nearly a 10% stake in the firm.

As more public companies have been snatched up by private equity firms over the last year, some critics have accused buyout firms of enriching themselves and their investors at the expense of workers whose jobs may be lost as the purchased companies are restructured.

On Tuesday, however, Unite Here, a hotel workers union, said in a statement that Blackstone had demonstrated “fair treatment” of hotel workers in several major markets.

In recent weeks, rising long-term interest rates have spurred concern on Wall Street that the takeover boom might be peaking. But Blackstone said Tuesday that it had already lined up financing for the Hilton deal from a consortium of banks.

Blackstone, co-founded by CEO Stephen Schwarzman in 1985, has become one of the world’s premier buyout firms, with $88 billion in assets under management.

The company went public last month, the second major U.S. private equity firm to do so. Blackstone sold 133 million shares at $31 each June 21.

But amid concerns that Congress may try to raise taxes on profits of buyout firms, the stock has slumped since the offering. It closed Tuesday at $29.72.

Public shareholders of Blackstone own a small stake in the management company but don’t participate directly in ownership of the companies it buys.

kimi.yoshino@latimes.com

tom.petruno@latimes.com

roger.vincent@latimes.com

(BEGIN TEXT OF INFOBOX)

Hilton highlights

1919: Conrad Hilton buys his first hotel, the Mobley, in Cisco, Texas

1925: Conrad Hilton builds the first hotel to carry his name, “the Hilton,” in Dallas

1946: Hilton Hotels Corp. is formed

1949: Hilton buys the Waldorf-Astoria hotel in New York

1964: The company spins off Hilton International as a separate corporation

1979: Conrad Hilton dies at age 91. His son Barron Hilton is named chairman of the company.