Talk of the deal has been circulating for months, and now it's a reality: Hilton Hotels (NYSE: HLT) announced on Thursday that it's going to buy the lodging assets of the British company Hilton Group PLC for $5.71 billion in cash. Hilton Hotels claims that the combined company "will be the largest and most geographically diverse lodging company in the world."
Bigger may indeed be better. Just consider the positives of this acquisition. Currently, each company is an equal 50% owner in Hilton HHonors Worldwide (a frequent guest discount program), Hilton Reservations Worldwide, and the luxury tier Conrad Hotel chain. Integrating the lodging assets of Hilton Group, which is changing its name to Ladbrokes PLC as part of the deal, will be greatly simplified because of these pre-existing joint ventures. Also of benefit is that 261 of the 403 hotels to be acquired are already branded with the Hilton name.
The jewel in the deal is that Hilton Hotels will once again own the worldwide rights to the Hilton name. Since 1964, when it spun off its international operations to shareholders, it has owned only the U.S. rights. Worldwide rights will strengthen Hilton's brand by eliminating consumer confusion and standardizing the quality of properties and the overall customer experience.
But is the acquisition price reasonable? And how does the future look for Hilton Hotels' stock? At current exchange rates, the purchase price equates to a multiple of 11.3 times pro forma 2006 adjusted earnings before interest, taxes, depreciation, and amortization. That seems reasonable, since Hilton Hotels itself currently trades at an enterprise value-to trailing-12-month EBITDA multiple of 10.7. Furthermore, a majority of the hotels being acquired include the upscale (and higher-margin) Hilton and Conrad names, whereas at the end of September, a majority of the hotels administered by Hilton Hotels (56.2%) were operating under the Hampton Inn name, a lower-margin value brand.
Consider this, too: Analysts expect Hilton Hotels to grow earnings by 15% annually for the next five years. That's the same projected growth rate as Starwood Hotels and Resorts (NYSE: HOT), Marriott International (NYSE: MAR), and Choice Hotels International (NYSE: CHH), yet Hilton trades at a trailing-12-month earnings multiple that's lower than any of theirs.
The acquisition, which is expected to close in the first quarter of calendar year 2006 and be accretive to Hilton's standalone 2006 earnings, will provide Hilton with two high-quality brand names to expand internationally. Investors must like the news because the stock had risen by more than 7% in Thursday's afternoon trading.
At 22 times trailing earnings, Hilton Hotels stock has room to move to the upside without becoming overpriced. With a simple-to-integrate acquisition ahead, its long-term growth prospects have been greatly enhanced.
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