Analysis: Why Blackstones Troubles Wont Bruise Hiltons Brand

Article Tools

Latest News

More Latest News

In no other segment of the commercial real estate industry is branding as important as it is in the hotel sector. But can a brand even a household name with global reach and a long history of quality and integrity be enough to overcome poor performance, financial distress and legal troubles?

Thats the test Hilton Hotels faces as it copes with a variety of well-publicized issues that dont make for favorable headlines.

Two weeks ago, Hiltons owner, The Blackstone Group, struck a deal to reshuffle the companys debt load, cutting its obligation from $20 billion to $16 billion. To get the job done, Blackstone had to contribute $800 million to buy Hilton debt at a discount.

Part of the trouble, of course, stems from the poor operating environment everyone in the hotel business, Hilton included, has been forced to endure for 18 months with no substantial end in sight.

The bigger problem, however, was Blackstones hubris in its 2007 purchase of Hilton. The equity firm bought the hotel chain for $26 billion, which equaled a 25% premium over the companys highest per-share stock price.

The transaction was loaded with debt, and although Blackstones overall performance has improved in recent months, the Hilton deal still hangs like a boulder around its corporate neck. But on a property level, its business as usual and most guests dont know or care if they do that the parent company is struggling.

Court drama

Hiltons highly publicized legal battle with Starwood Hotels is even more embarrassing for the chain. Last April, Starwood sued Hilton and two of its development executives Ross Klein and Amar Lalvani.

The lawsuit claimed that the pair took company secrets with them when they left Starwood to help Hilton develop Denizen, a new lifestyle brand that would compete with Starwoods successful W brand. In light of legal trouble, Hilton suspended development of Denizen.

Last month, the waters became muddier when the federal government filed a court motion seeking a delay in the suit while it pursues possible criminal violations in connection with the case.

As nasty as these developments have become, theyve had no discernible effect on Hiltons business or its reputation among the public or, more importantly, the lodging ownership and development community.

Big breakup?

Thats the sunny side of the story. Things could still get uglier at Hilton on both the financial and legal fronts. Should the travel business not rebound as quickly as everyone hopes, or if some of Blackstones other investments sour, the equity firm may move to sell or, worse, breakup Hilton.

There probably arent many private equity firms, individuals or sovereign funds that would either have the nerve or cash to pay anywhere near what Blackstone shelled out for Hilton at the top of the market three years ago. It took Hilton decades under its former ownership to create a symbiotic family of 10 brands under the corporate umbrella today.

Divestiture of some of its more attractive and successful brands Hampton Inns and Embassy Suites are both stars would adversely affect the rest of the portfolio. Owners and franchisees Hiltons real customerswouldnt like it.

Even uglier could be the end game in Hiltons legal tussle with Starwood. A worst-case scenario would involve criminal action against Hilton officials, perhaps all the way up to the executive suite. Visions of company officers made to do the perp walk could certainly put a major dent in Hiltons apple-pie image, and founder Conrad Hilton would be rolling in his grave.

Again, such a development would cause upheaval among property owners, leading to slower unit growth and possible defections from the brand.

Still, even if the worst happens at Hilton, damage to the brand could be minimal. Ultimately, the briefcase-toting, carry-on-luggage-hauling road warriors really dont care what happens at Hilton corporate as long as their favorite Hilton Garden Inns or Embassy Suites are still clean, convenient and reasonably priced. And perhaps most importantly, these frequent flyers still earn their HHonors frequent guest points.

When its all said and done, its all about the brand in the hotel industry. That wont change, no matter whos in charge, who goes to jail, or whos losing money.


Acceptable Use Policy
blog comments powered by Disqus

NREI Interactive Products


Blogs


http://nreionline.com/blog/schein_blog_headshot.jpg

Real Vox

Traffic Court

The Full Nelson

Events

Strategic Real Estate Investment Conference

Date: Thursday, June 7, 2012
Time: 7:45AM-6:00PM
Place: 1290 Avenue of the America, 5th Floor
What: A full-day event exploring portfolio diversification through opportunistic and alternative investments....

Click here to view more events...

http://nreionline.com/nrei-300x125-house-091211-resourcebook-jpg.jpg