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Hiltons reunited – but why now?

06 January 2006
Hiltons reunited – but why now?

At the very end of December California-based Hilton Hotels Corporation (HHC) announced it was paying £3.3b to buy the hotels business of Hilton Group, the UK hotels and gaming company. The biggest question that arises from the impending marriage is: why now?

The couple have been formally engaged since 1997, when they signed their joint marketing agreement, and yet it has taken eight more years until finally committing to a date to walk down the aisle.

As late as this summer Hilton Group chief executive David Michels was saying that he saw no compelling reason to do the deal. Of course, this may just have been a poker play, a game Michels is noted for.

Despite all the huffing and puffing about different sets of shareholders not wanting US stock or UK stock, or talk of tax implications, the real stumbling block to any merger is usually the personalities.

And in this case there were big personalities: HHC chief executive officer Steve Bollenbach and Michels in a trans-Atlantic face-off. It could be argued that Michels has come-off the worst, except that personally he will be some £9m richer.

In terms of bragging, HHC certainly seems happier than Hilton Group. The investor presentation from HHC ran to 70 slides. Hilton Group had just nine.

HHC addressed the "why now" issue in a presentation to shareholders after announcing the proposed purchase. It suggested that the strong free cash flow and strong balance sheet of HHC put it in the position to do the deal and it said that Hilton Group was willing to sell.

HHC also said that the recovery in the UK and Nordic markets was a key driver. And it added that Hilton Group's strategy had begun to mirror its own, thanks to a focus on fees and asset sales.

The latter point is worth looking at more closely. While it is true that HHC has a successful franchise business thanks to its Promus acquisition, it has not been as aggressive at selling existing upscale property as Hilton Group.

But it has a huge asset base and must surely come under pressure from its own shareholders to follow the example set by Starwood, which sold much of its real estate to Host Marriott late in 2005.

As HHC sells, its revenue stream will shrink, probably meaning it will no longer qualify as the world's largest hotelier by revenues.

Just as likely, however, is that HHC's rivals will seek to make further acquisitions themselves. A key reason that this deal is an acquisition of Hilton Group's hotels, rather than the other way round, is that, currently, investors in the USA are placing a higher valuation on hotel company shares than investors in Europe. So the Americans have the upper hand.

For other European hoteliers this is a worrying situation. In particular, InterContinental Hotels Group looks a possible target, with either Starwood Hotels or Marriott International possible bidders.

Indeed, gossip from the other side of the pond suggests both of these US companies have their slide rules out and are examining InterContinental. Further trans-Atlantic consolidation seems highly probable.

by Andrew Sangster

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