Sam Zell looks to add to Starwood stake.
Thursday, 8th January 2009
Source : By Passion of a Zealot Andrew Calvo
One of the first big news items right out of the gate in 2009 is the announcement that Sam Zell's Equity Group Investments has signed a confidentiality agreement with Starwood Hotels.

Some news reports claim to not know what the confidentiality agreements cover, and some are reporting that it essentially gives Zell's Equity Group Investments first right of refusal if Starwood goes into any talks for a takeover or merger. Ironically, the media has attempted to contact Starwood's corporate offices but voice mails are claiming that everyone is away until Jan 5th.

Prior to this, it has been known that Sam Zell owns 18% of Starwood Hotels, but he has never asked for any board seats or control of the company, its been merely a passive investment. With this agreement it now seems as though Zell is interested in Starwood for more than a passive investment.

Could Starwood be Zell's next major purchase?

Why would Zell want Starwood? Well, since mid-2007 Starwood has lost almost 80% of it's value, going from a market cap of around 13 billion to a current market cap of around 3.5 billion. During that time frame, nothing substantially has changed in Starwood's business to back up that loss - except for the overall economy and travel environment.

If anything, in the past year and a half, Starwood has become even more valuable with the launch of Aloft and Element hotels. Not only that but Starwood still owns over 41 hotels throughout the world and they have made no secret of their desire to get rid of a majority of them, keeping only a few flagship properties from each brand.

This wouldn't be the first time that Starwood Hotels was seen as a takeover target. There have been a few times throughout 2008, and even 2007 right after Blackstone purchased Hilton that Starwood was being rumored as being a takeover target - but nothing except rumors seem to have come from that news.

Would A Takeover By Zell (or another Private-Equity Firm) Be Good For Starwood?

I don't think that there would be any major benefit to Starwood if they were to be taken over and brought private. Except for not having to answer to the stockholders and ensuring that revenue rises quarter after quarter. Starwood Hotels has set itself up for alot of success in the future. It's laying the groundwork for a large expansion - and that's just it, it requires outside developers to realize that goal compared to major corporate outlays of cash. So I don't think the argument of having a large cash-rich private equity firm behind them would speed anything up.

Starwood decided to make themselves more reliant on franchise and management fees rather than being the owners of the physical properties. The benefits to this are very apparent in a down market - their only exposure is a lower fee base from the developers - but unless the hotels close up and hang out a for sale sign - Starwood still stands to earn money. There is no need for them to write off or take a charge for the declining value of the properties and there is no need to worry about the debt coming due on the properties.

It would however be a great purchase for Zell and his Equity International. They would claim the benefits of Starwood's cash flow, continue the sale of the majority of the wholly-owned Starwood hotels and push the marketing of Starwood and its brands.

But the risk is also there that they might poach Starwood for its assets and leave it hanging by a thread - look at what has happened to alot of other Private-Equity deals over the past few years - Chrysler being the one that comes to mind first, buit seems as though it's a pattern for private equity to purchase a company with debt - and then pile that debt onto the companby being purchased, instead of making the private equity firm be ultimately responsible for it. It spells nothing but disaster and questions where the best interests lie.

Unfortunately with the economy the way it is - money says alot, and those that hold the money these days are the decision makers. My only hope is if Zell or another private equity firm purchases Starwood that it really does have Starwood's best interests at heart.


Andrew Calvo is a 26 year old Commercial Real Estate Advisor in New Jersey. I live in Tinton Falls, NJ. This blog is about my passions - primarily hotels, commercial real estate, and development, etc.

Since I have been in High School Ifve had numerous jobs, but the field which has always interested me is Real Estate, Hotel Development and Construction. I consider myself a zealot in that area - I try to absorb as much as I possibly can, take the experiences that I learn, or read about and use them in my life.

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