• Hilton pain over spying continues

Hilton looks set for a protracted period of embarrassment over legal action regarding spying on rival Starwood Hotels.

But suggestions that this will make a significant dent on its capacity or willingness to grow look wide of the mark. And Blackstone, while suffering considerable write-offs from its purchase of Hilton, remains an aggressive buyer.

Last week the Wall Street Journal reported people close to the criminal action against Hilton as stating that "an aggressive approach" is to be taken. The launch of the legal action by Starwood (see here for the details http://www.hotelanalyst.co.uk/weekly_articles/article/3091/) appears to have created monster which is no longer under Starwood's control.

The initial writ certainly caused embarrassment for Hilton and led to the suspension of the team looking after the prestige portfolio which was headed by Ross Klein. The writ named Klein and Amar Lalvani, Hilton's global head of luxury and lifestyle development, alongside Hilton itself. Klein has now been replaced and Lalvani has also left.

Also now reportedly embroiled in the investigation by the US Department of Justice is Steve Goldman. He left his post as Hilton's head of global development in the summer.

Hilton is maintaining that there is no case to answer. Lawyers for Klein and Lalvani said the same thing. Goldman's lawyer similarly said that his client had, and would retain, a "sterling reputation".

Hilton CEO Chris Nassetta last week wrote to hotel owners about the legal action. He said: "We take these matters very seriously and are working tirelessly to resolve them."

He said that Hilton had acted swiftly following the law suit from Starwood but he was unable to discuss details due to the ongoing legal action. "Hilton is committed to resolving this situation with the highest levels of integrity," he added.

Meanwhile, Blackstone, the owner of Hilton, has agreed a deal to buy the theme parks currently owned by Anheuser Busch for up to $2.7bn. In a sign of straightened times Blackstone is understood to be pumping as much as $1bn of equity into the deal and has agreed to share some of the upside with the vendor.

When it bought Hilton, Blackstone had to find just $5.7bn of the $26bn purchase price, according to the press release at the time of the deal's announcement. This also stated that $20.6bn of debt and mezzanine debt was used to finance the deal.

Earlier this summer, leaked documents showed that Blackstone had written down the equity value from its BCP V fund (the same fund currently buying the theme parks) from $1.45bn to $745m. Presumably the equity from other Blackstone funds in the deal was also similarly written down, which creates a loss of around $2.85bn in total.

The debt portion of the deal is understood to comprise $12bn of mezzanine and $8.6bn which had been earmarked for securitisation by the investment banks under writing the transaction.

The collapse of the commercial mortgage backed securities market meant that this debt was not unloaded as planned (although some was subsequently sold-on). Specialist press speculation suggests that as much of $4bn of the debt in the Hilton deal is currently held in a fund owned by the US government. But aside from this complication, the failure to securitise the debt makes a restructuring easier.


HA Perspective: While embarrassing, it looks highly unlikely that the Starwood lawsuit and subsequent criminal investigation is going to lead to the meltdown at Hilton that has been seen at some businesses, such as Arthur Andersen.

Andersen was laid low over its role with Enron. There were substantially bigger issues at stake, both in the quantum of the dollar sums involved and the level of criminality, at least with Enron's executives.

It is certainly worth remembering that Andersen went down even though it was eventually cleared of wrongdoing. The not guilty verdict unfortunately came long after Andersen had collapsed as a viable business.

Therefore, if criminal charges are brought against Hilton, it will be forced into a full-scale damage limitation exercise above and beyond the latest Nassetta letter and suspensions to date. It looks like Goldman has already been forced to fall on his sword and he might not be the last.

But it is doubtful that potential owners or franchisees will be significantly deterred by a manager overstepping the mark against another manager. The allegations and lawsuits about charge backs and the like brought by owners against managers are of far more interest.

The most concerning thing for most owners of hotel property looking to employ Hilton as a manager would be the stability of the company itself, given its over-leveraged situation.

Most insiders to the deal seem to be expecting Blackstone to seek a restructuring that will rescue some of its equity. And Blackstone already has the firepower to conduct just such a restructuring and looks set to obtain even more.

This week, it was reported that the firm is looking to list up to eight of its portfolio companies and selling five others. The hospital staffing firm Team Health was named as one of the eight and four of the five sales have already been announced.

Although fund raising has fallen to levels last seen in 2003 according to the latest report from research house Preqin, private equity looks set to remain a contender in property deals.

The latest in the hotel sector has been the proposed purchase of the debt in the bankrupt Extended Stay chain in the US by a Starwood Property led group. This group is seeking to acquire $4.1bn of the senior debt for $3.5bn and obtain first charge on the restructured business, according to reports.

The messy bankruptcy, which followed the $8bn purchase of Extended Stay by Lightstone Group from Blackstone in April 2007, is also being investigated by the US Justice Department.

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