Blackstone offer for Hilton appears to fit the current market standard formula at a share price 40 % above the current common stock pricing.  The offer will no doubt set Hilton on the path to create a multi-buyer auction even at the stratospheric $ 26 billion level of the offer despite any proposed stimulus to avoid such action in the proposal.  After all, Hilton was watching when Sam Zell extracted the final penny from the forlorn Equity Office Properties portfolio.  Even Sam was quaking when he contemplated managing that beast of a portfolio through the coming meltdown.  There are those who will debate that last vociferously, but the contention here remains that the EOP portfolio was nothing but wasted properties scheduled for the B & C heap in the next decade.  Zell is noted for putting a pretty face on outdated structures with antiquated systems before selling to the portfolio initiate.  After all, Zell can always go back to this market when the private equity players including Blackstone finish emulating the Canadians, Japanese, Savings & Loans, syndicators and other major now insolvent investors of the past.  I’ll bet Mr. Zell is just resting up and letting the dust clear on EOP before he puts Equity Residential Properties, a conglomeration of Class B & C properties making noise like the A players, on the market to complete his withdrawal from the basic food groups of real estate before the coming meltdown.  100 to 1 says he gets on this latter wagon before the 2nd quarter of next year so that he can close early in the 3rd quarter, 2008 at the latest. 
But I digress because the prospects of the Hilton transaction for the Blackstone investors on an un-leveraged basis pending further due diligence may be worth considering, I say may be.  What I’m saying is that the future of Hilton when the purse strings allow investment unhindered by what I sense is years of too conservative oversight is excellent.  The company has finally reacquired its offshore heritage, Hilton International, and set its course for international growth.  It used to be that the company was untowardly dependent on seven or eight major birthright domestic portfolio hotels for its earnings and survival.  That strategy was successful since the company had base income while it built the Promus acquisition and marketed its home grown brands.  But every strategy has limits and aging properties past their prime may not be the best use of assets in the future.  In any event, management now has growth options to be envied and used wisely. 
The question is whether Hilton post-Blackstone close will be so highly leveraged that the company will not be able to generate further funds to accomplish the business model.  Is the purchase price attractive to the current Hilton stockholders because it extracts a price which negates the need to accomplish that business plan?  If so, the only play will be to sell the pieces like the EOP transaction to get the money back in reasonable time with anticipated returns.  If I were a Blackstone investor, I would want to hear more about the structure and pricing of the acquisition capital.  After all, the market probably values Hilton at an earnings ratio which anticipates the coming 2009 economic meltdown and hospitality industry overbuild.  If that current multiple is say 12 and the overbid is 40 %, the purchase is being structured around a 20 multiple of current earnings.  The offer is advertised as all cash, but that just means the existing Hilton shareholders will get theirs at the close.  No doubt the 5 % / 20 multiple return will require extreme leverage to meet any reasonable investment criteria for the buyer.  While the buy is advertised as a core investment purchase, that isn’t Blackstone’s usual mission and a deviation from what the public investors may have expected when the public offering closed.  The devotion of the income stream to the acquisition starving the expansion possibilities doesn’t sound like the Hilton business plan will work for Blackstone. So like the EOP purchase, this may turn into a plan which will be reviewed by business schools in the next decade as folly.  The Cerberus purchase of Chrysler shows us what happens when these plans crater like the Daimler purchase of Chrysler for $ 37 billion did.  Blackstone is reaching here like they did with EOP and they may be at the wrong price at the wrong time.
Hilton may have great prospects as the going concern it is now under the current business model.  The Blackstone purchase may just be speculation like many of the other recent private equity real estate purchases.  If so, the result will inevitably create investment losses and the profiteering will be had by today’s Hilton stockholders and the purchasers of distressed Hilton assets when they come to the opportunity market at a later date.  If Blackstone can create an intervening successor investor(s) to take it out, it may not be the greater fool.  But I think I’d sit on the sidelines here at this time if I was a prudent investor.  Real estate is an easy involve but, Oh God, it’s absolute murder to get out when the tables turn.                                


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