Mr. Sean P. Smith

With the bombshell that Hilton Hotels was going to be acquired by private equity giant Blackstone last week, we wanted to get a few words with Zacks senior hotel industry analyst Sean P. Smith. He described what he was seeing in his current industry outlook.

Can you start off by giving us a couple of the details surrounding the Hilton buyout?

Sure. On Tuesday, after the close of the market, Hilton Hotels Corporation (HLT) announced that the company had agreed to be acquired by the Blackstone Group (BX), a private equity firm that recently went public via a much-publicized initial public offering.

Blackstone agreed to pay approximately $26 billion for Hilton, including the assumption of Hilton’s debt. The cash offer of $47.50 per share represented a premium of 32% over Tuesday’s closing price, and a 40% premium to Monday’s closing price, as the shares were up strongly on Tuesday ahead of the deal announcement.

What are your thoughts about this deal?

The purchase price represents approximately 15.2x management’s 2007 EBITDA guidance. This is a rich multiple, considering that that large-cap hotel companies had been trading at multiples closer to 11x – 12x EBITDA. As a result, and not surprisingly, many stocks in the hotel sector posted strong gains on Thursday, including Starwood (HOT) up 7.8% and Marriott (MAR) up 7.0%.

The Hilton acquisition is the latest in a string of hotel company buyouts, ranging from large brands such as Four Seasons, to smaller hotel real estate investment trusts (REITs) such as Winston Hotels, Innkeepers USA Trust, and Equity Inns (ENN). This acquisition activity, and the premiums at which the deals have been accomplished, indicate that institutional buyers continue to place higher valuations on the hotel assets than are currently being afforded in the public markets. The attributes of the hotel companies, including tangible real property and strong cash flow generation, have proven to be in high demand.

It is interesting to note that, while Blackstone is a private equity firm, the company views this acquisition as a strategic transaction, as opposed to a purely financial deal. As such, Blackstone does not anticipate making substantial dispositions as a result of this transaction. This varies from some recent transactions, such as Blackstone’s acquisition of office REIT Equity Office Properties earlier this year, where Blackstone has since sold off portions of the portfolio.

This has been an extremely busy time period for Blackstone.

That’s right. Blackstone has been one of the largest buyers of hotel-sector assets in recent years. Blackstone currently owns more than 100,000 hotel rooms throughout the U.S. and Europe, and its portfolio spans the spectrum of lodging industry.

Blackstone owns the La Quinta brand, and has grown that brand by 45% in roughly a year and a half since its acquisition. The company also owns numerous luxury properties through its LXR Luxury Resorts portfolio. The acquisition of Hilton significantly increases Blackstone’s presence in the lodging industry.

How do you envision this industry will react to this development going forward?

The largest immediate impact, as was seen in Thursday’s trading, will likely be to shares of Starwood and Marriott, given their size and position as franchisors like Hilton. Speculation will now turn to other potential buyout candidates. Starwood has been the topic of buyout speculation since the company’s CEO stepped down earlier this year.

If one of the remaining large-cap lodging companies were to be acquired, we think it more likely that a group of investors would potentially be involved, as opposed to the Hilton deal where Blackstone was the sole buyer. Blackstone’s size and interest as a strategic buyer put it in a somewhat unique situation in that regard.

Sean P. Smith is a senior analyst covering the hotels, travel & leisure industries for Zacks Equity Research. Mr. Smith joined Zacks Investment Research in 2006 as a Senior Analyst covering the lodging sector as well as special situations. Most recently, Mr. Smith was a Senior Equity Research Analyst at Stifel, Nicolaus & Company, and previously worked as an Associate Analyst at A.G. Edwards & Sons, covering Real Estate Investment Trusts. Mr. Smith is a graduate of the University of Missouri – Columbia, where he earned a Bachelor of Science in Business Administration, majoring in Finance and Banking. He holds NASD Series 7, 66, 86, and 87 licenses.