NATIONAL REPORT -- The news on Wall Street as of late may not be as earth-shattering as the recent Hilton/Promus merger, but life in the big pond is never dull.
Some of the big fish that keep swimming include Starwood Hotels & Resorts Worldwide Inc., which is in the news again, as well as Lodgian Inc. and Marriott International Inc. Others in the news more recently are MGM Grand Inc. and TriNet Corporation Realty Trust of San Francisco.
Starwood, one of the world’s largest hotel and leisure companies, which through its subsidiaries operates the Sheraton, Westin, St. Regis/Luxury Collection, Four Points, W and Caesars brands in August announced record financial results for the second quarter ended June 30. Pro forma comparable diluted earning per share from continuing operations increased a whopping 48% to $85 million or 43 cents a share, on revenues of $945 million over the like year-earlier period.
Michael Mueller, Senior Managing Director of NationsBanc Montgomery Securities, estimated EPS for Starwood $1.53 this year and $1.88 in 2000, compared with $1.27 last year. Michael Rietbrock of Salomon Smith Barney estimates Starwood’s EPS to be $1.56 this year and $1.92 next year.
More recently it announced its plans to sell $500 million worth of assets by the second quarter of 2000, raising money to buy back stock. It is currently in talks to sell $200 million worth of properties.
But it is also in “iffy”, if not confusing, discussions to merge with TriNet Corp. Realty Trust of San Francisco. TriNet, a real estate investment trust (REIT) in a stockswap by Starwood Financial Trust, a REIT that specializes in mortgages and other firms of property finance. According to an article in Barrons, a Dow Jones publication, the initial reaction was overwhelmingly negative. “Wall Street analysts complained that the investment objectives of the proposed merged companies would be far different and riskier than those in TriNet’s original business plan.” Also, key members of Starwood Financial’s management, including Barry Sternlicht, chairman and CEO of Starwood Hotels & Resorts, would be selling to the merged entity they owned that advised Starwood Financial. Conflict of interest? You bet.
Larry Raiman, an analyst for Donaldson Lufkin & Jenrette called it a “conflict of interest” dilutive to TriNet shareholders. And, according to David Sherman of Salomon Smith Barney, valuing the post-merger company is nearly impossible because “there are really no comparable companies.” According to the Barrons article, Sherman and others on Wall Street don’t see much of a benefit if the merger is approved, but there is a serious downside risk as TriNet shareholders sell their stock.
But if TriNet shareholders reject the merger and if TriNet sells to or merges with someone else within nine months of the merger being vetoed, it would have to pay Starwood a breakup fee of $50 million, or about $2 a share, a troublesome thought for TriNet investors and analysts.
Whatever happens, it is a confusing situation with lots of ifs and buts involved with the thought that only Starwood is in a win-win situation. Starwood, which converted from a REIT to a C-corp. status, was traded at 22 5/16 on Sept. 21, the day the Dow Jones took a nosedive of over 225 points. This was down from a 12-month high 37 3/4.
In an unrelated development, Lodgian Inc., which owns or manages 134 hotels with more than 25,000 rooms as a successor to Servico Inc., said it expected to report net income per share before extraordinary items of 23 cents to 25 cents for the third quarter ended Sept. 30, versus a net loss per share before extraordinary items of 71 cents in the like year-earlier period. Robert S. Cole, Lodgian’s President and CEO, said that his company’s continued improved operations performance for the third quarter and anticipated improvement in the fourth quarter over 1998 was driven by successful hotel renovations and upscale brand repositioning, as well at its commitment to improving margins and developing its premier sales organization.
For July and August, Lodgian’s 132 consolidated hotels consisted of 77 stabilized hotels, 34 stabilizing hotels and 31 hotels being repositioned. In the last part of September, Lodgian, which claims it is one of the nation’s largest owners and operators of hotels, announced the acquisition of the remaining 49% partnership interest in six full-service hotels with a total of 1,277 rooms from its limited partner for approximately $10.2 million. Funds for the acquisition came from Lodgian’s existing cash reserves.
Prior to the acquisition, Lodgian owned 51% of the partnerships that owned the following hotels: Crowne Plaza-Worcester, MA (243 rooms); Crowne Plaza-Saginaw, MI (177 rooms); Hilton-Sioux City, IA (193 rooms); Holiday Inn-Ft. Wayne, IN (208 rooms); Holiday Inn-Cleveland/Richfield, OH (217 rooms); and Holiday Inn-Augusta, GA (239 room). This equates to $35,000 per room. On the basis of full-year earnings before depreciation, taxes and amortization (EBITDA) projections, Lodgian estimates that it is paying slightly over six times EBITDA for these partnership interests.
Cole notes, “At a little over six times 1999 EBITDA and with no adverse impact on our existing debt level, we believe this transaction represents a favorable return on investment and an appropriate use of a small portion of the company’s cash reserves.”
On the subject of Lodgian’s recapitalization program, Cole said, “I would also reiterated that the completion of our $565 million recapitalization program in July put in place a capital structure that now allows the company to execute its business strategy without the pressure of near-term debt maturities.”
Mueller of NationsBanc Montgomery Securities comments that Lodgian is a smaller capitalization company that is trading at a large discount to its asset value, “and you can make a case that even at a low multiple, the stock is still double from here.” As of Sept. 21, Lodgian was traded on the New York Stock Exchange at 4 5/16, down from its 12-month high of 8 5/16.
Marriott International made news when it said it plans to spend $85 million to modernize its headquarters in Bethesda, Md., where it plans to add 700 jobs in the next five years. It has agreed to stay in its current location for another 23 years in exchange for $44.2 million in state and local government incentives.
J.W. Marriott, Jr., chairman and CEO, said “Over the next five years, we will add 1,000 new hotels to our lodging system. More than 432 are under construction or currently committed. That kind of growth will require a great deal of planning, and those efforts will occur right here at our headquarters in Montgomery County.
Salomon Smith Barney says it continues to expect Marriott to add 140,000 rooms to its system over the next four years (1999 to 2002). “We estimate that around 40% of these rooms will be in luxury and full-service categories and about 20% in the extended-stay sector, with the remaining balance falling into the midscale and limited-service categories. Approximately 20% of these rooms are expected to be outside the United States.
Salomon Smith Barney estimated earnings per share this year to be $1.66 and $1.95 in 2000, compared with $1.46 last year. On Sept. 21 its stock closed on the NYSE at 31 13/16 down from its 52-week high of 44 ½.
Finally, Reuters reported that MGM Grand Inc.’s shares fell about 5% on Sept. 16 when speculation that the casino operator could launch a hostile bid for Mirage Resorts Inc., fueled by reports that MGM Grand’s chairman bought a stake in his company’s Las Vegas Strip neighbors. This came after Prudential analyst Joe Cocchimiglio put out a report saying MGM Grand could make a hostile bid for Mirage in all-stock deal valued at $18 to $20 a share. “MGM Grand commands the premium multiple amongst the largest companies with a presence in the major markets of Las Vegas and Atlantic City,” he said. “Additionally, we think the Street would love the transaction as it would create a much larger company with powerful growth potential in Atlantic City and Las Vegas.”
But other analysts and MGM officials said that, in the near terms, the prospects of MGM Grand launching a bid for Mirage was unlikely despite its chairman Kirk Kerkorian’s reputation for making hostile bids to maximize shareholder value. In the long term, they said they saw further consolidation of the rapidly expanding Las Vegas Strip.
