Articles
"Two Deals that May Change the Lodging World
Forever", (c) Jim Butler, www.HotelLawBlog.com, 2/28/07
History is being made. The biggest leveraged
buy out ever keeps getting bigger. Sam Zell has
orchestrated an auction for his Equity Office
Properties. And the latest bid from the Blackstone
Group is $54 per share, bringing the deal value to
$38.3 billion and topping the prior bid from
Vornado.
At the same time, one of the biggest hotel deals in history — perhaps small
change compared to the Equity Office Properties deal but very significant in its
own way — has been announced with the $6.6 billion acquisition of CNL Hotels &
Resorts by Morgan Stanley and the contemporaneous spin off of $2.4 billion of
hotel assets to Ashford Hospitality Trust Inc.
How could these two transactions affect the lodging world, and what is the
impact beyond the immediate transactions themselves?
Is private equity forcing a major paradigm shift?
I believe that the Equity Office Properties (EOP) and CNL Hotels & Resorts (CHL)
transactions represent a paradigm change that could forever change the lodging
world or at least profoundly affect the players sitting at the tables.
It was not long ago that an acquisition of a “few hundred million” was a huge
undertaking. A billion dollar deal was remarkable.
Now we have a $6.6 billion deal for the second largest hotel REIT. And
although the EOP deal sets the new benchmark, I suspect it is only a precursor
of much more to come, where deals may soon top $100 billion, making even the
largest U.S. companies — much less the largest hotel companies — targets for the
private equity funds.
Let’s look at this phenomenon in more detail — first the details of the
immediate transactions, and then the implications for the lodging industry.
The CHL Transaction
CNL Hotels & Resorts (CHL) is the second largest hotel REIT in the United
States, and owns one of the most distinctive portfolios of luxury and
upper-upscale lodging properties. On January 19, 2007, CHL announced execution
of a definitive agreement to be acquired by Morgan Stanley Real Estate at a
price of $20.50 for approximately $6.6 billion for all company’s outstanding
stock.
In connection with this transaction, CHL contemporaneously announced the sale
of 51 hotel properties to Ashford hospitality trust for approximately $2.4
billion, immediately prior to the Morgan Stanley transaction.
This leaves Morgan Stanley Real Estate with eight iconic luxury properties
including the Grand Wailea Resort in Maui, La Quinta Resort and Club in La
Quinta, California and the Arizona Biltmore Resort in Phoenix, Arizona.
Prior to this transaction, CHL agreed to sell 32 assets to a Whitehall Street
Global Real Estate affiliate for $405 million, a deal that is scheduled to close
in the first quarter of 2007.
This is obviously a significant transaction for the participants — Monty J.
Bennett, Ashford’s president and chief executive, described it as a
“transformational investment.” And certainly this major acquisition of one of
the largest hotel REITs will have some immediate impact on the hotel industry.
(Who hasn’t dreaded bidding on an asset or portfolio against CHL, which has one
of the lowest costs of capital in the industry?)
But I predict that this is just the precursor or harbinger of things to come,
and presages a new flood of private equity into the lodging sector in search of
yield and value.
In order to better understand the potential, let’s take a quick look at the
EOP transaction — a deal outside the hospitality industry, but instructive on
the seemingly unlimited ability of private equity funds to raise capital.
The EOP Transaction
Equity Office is the juggernaut created by the legendary Sam Zell. It is the
largest landlord in the U.S., owning more than 600 buildings across the
country.
On November 19, 2006, Equity Office agreed to sell itself to a Blackstone
affiliate for $48.50 per share or about $19 billion, plus $16 billion in debt
assumption.
Then in January 2007, a group led by Vornado Realty Trust and including Barry
Sternlicht’s Starwood Capital, made an informal bid for EOP at $52 a share (60%
in cash and 40% in stock), and EOP gave the competing group due diligence access
and a short deadline for making a formal offer.
However, in a preemptive move, on January 25, 2007, Blackstone increased its
all-cash offer from $48.50 a share to $54 a share, or a total price of $38.3
billion — the world’s biggest leveraged buyout. This is an 11% increase from
Blackstone’s prior offer and a 20.8% premium to the EOP stock price prior to the
initial deal announcement. In exchange for its increased bid, Blackstone got a
bigger “breakup fee” if EOP chooses another bidder — a $500 million breakup fee
(up from “only” $200 million).
The shares last closed at $55.22, apparently on speculation that the Vornado-Starwood
group will go even higher.
What are the implications of these two deals for the hospitality industry?
The CNL Hotels & Resorts and Equity Office Properties transactions suggest
that private equity funds can do a deal of almost any size. In fact, on January
26, 2007, just after making his record-setting $38.3 billion bid for EOP,
Stephen A. Schwarzman, the chairman of the Blackstone Group, spoke at the World
Economic Forum in Davos, Switzerland.
His panel? It was called “Is bigger better in private equity?”
It is no secret that the big private equity firms have hundreds of billions
of dollars to invest. And these recent transactions suggest, as the New York
Times recently mused, that “perhaps even $100 billion companies . . . may soon
lose their ticker symbols.”
At the Davos World Economic Forum attended by Schwarzman, it was noted that
private equity had accounted for 20% of the merger and acquisitions in 2006, but
64% of the forum participants expected private equity to account for more than a
quarter of the M&A activity in 5 years — perhaps up to a third or more.
Industry experts are having heated conversation about private equity’s
insatiable quest for yield and value and its inevitable impact on the
hospitality industry. Some are wringing their hands and others are clapping –
but all are fascinated. I will share with you comments of some of those experts
soon, as we follow this important trend.
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