Hilton pushes hotels; Huntsman spikes; Lyondell up; Samsonite rises; BP, Shell slip; Cott climbs

By Ronda Fears

Memphis, July 5 - Hilton Hotels Corp.'s buyout by The Blackstone Group LP at $26 billion, or $47.50 per share - a 32% premium to the pre-holiday market - sparked a big spike in the stock, but it was being held well below the buyout price Thursday as players priced in a much higher risk premium.

Traders said the drag on Hilton's shares was twofold - that there could be funding hurdles for the deal and, related to that, that Blackstone paid too much. Such an argument also was made for the ServiceMaster Inc. buyout by private equity firm Clayton Dubilier & Rice Inc. in March at $4.5 billion, or $15.625 per share - a 31% premium to Nov. 27, a day before the company went on the auction block.

There have been an increasingly number of high-yield deals pulled recently, some tied to LBOs like ServiceMaster, and rumors have persisted for weeks of trouble in the First Data Corp. bond deal. ServiceMaster's $1.15 billion deal was pulled Tuesday, after having been restructured to make it more attractive to potential investors. The stock (NYSE: SVM) settled at $15.44, up 5 cents, or 0.32%.

First Data, which is being acquired by Kohlberg Kravis Roberts & Co. for $29 billion, or $34 per share, is expected to price $8 billion of bonds this summer, but market sources have said for weeks that there is growing resistance to the deal. First Data (NYSE: FDC) closed at $32.83, up 2 cents.

"Regardless of the Fed holding rates steady, the bond market yields have jumped, and especially in corporates they are hitting a wall with these deals. They are crafting deals based on the market dynamics six months ago and they cannot get them done," another trader said. KKR also filed for a $1.25 billion initial public offering Thursday, as had been rumored, following Blackstone's lead in going public, but he said that will not help in LBO funding troubles.

"It goes to the subprime meltdown in that Bear Stearns was forced to hold a fire-sale of its two hedge funds and through that we've learned that upwards of $2 trillion of debt linked to the crumbling U.S. subprime and Alt-A mortgages have been mis-marked on the books. Even the high-grade bonds have fallen off the cliff, not just the Treasuries."

Still, virtually the entire pack of hotel stocks was better on the Hilton news. The sector began heating up last November, when Four Seasons Hotels Inc. announced a private equity buyout, although terms of that deal did not emerge until mid-February - at $3.8 billion, or $82 a share - and by that time the stock had risen to $84, so it came at a discount to the then-current market.

Huntsman Corp., however, surged past a rival bid of $10.4 billion, or $27.25 per share, from Apollo Management LP's Hexion Specialty Chemicals Inc., which trumps the bid of $9.6 billion, or $25.25 per share, from Basell, which is controlled by U.S. industrial group Access Industries. Those deal values include debt. Traders said Huntsman shares roared past the new bid but came well off the session highs as some players think Access might drop the Huntsman story to make a move for Lyondell Chemical Co.

Luggage maker Samsonite Corp. climbed close to the price of its $1.7 billion buyout - at $1.49, a 12% premium to Tuesday's market - as 85% of institutional holders have pledged to support the deal with a group led by C.V.C Capital Partners. The stock (OTCBB: SAMC) gained 11 cents, or 8.27%, to $1.44.

Elsewhere, BP and Royal Dutch Shell are said to be in merger talks, according to The Times of London, but a trader said advances in those stocks in the United States cooled down after the Fourth of July holiday on news that The Bank of England raised its benchmark interest rate by a quarter of a percentage point to 5.75% on Thursday - the fifth increase in less than a year. That news, the trader said, along with oil prices over $70, and gaining Thursday, likely will reduce demand for oil products; yet, he said a BP linkup with Shell would be "a landmark," as they would produce more than 70% more oil and gas than industry leader ExxonMobil. BP shares are up 2% this week, he said, while Shell shares have gained 4.5% over the same stretch. On Thursday, however, both were pulling back in the United States. BP (NYSE: BP) slipped 59 cents, or 0.8%, to $72.92. Shell (NYSE: RDS-B) lost $1.05, or 1.22%, to $85.36.

Coca-Cola Co. has confirmed it is exploring a buyout of Britain-based Cadbury Schweppes plc's Snapple iced tea brand. Canadian bottler Cott Corp., which in mid-April confirmed it is talks with interested parties in merging Cott with the beverage arm of Cadbury Schweppes, is considered to still be in the running for Snapple, a trader said. "We think Cott has a private equity partner or partners and has a good chance of winning this one," one trader said. He said second-round bids are due next week and Cadbury is expected to select a winning bid by the end of July. Coca-Cola (NYSE: KO) dropped 23 cents, or 0.43%, to $52.67; Cott (NYSE: COT) advanced 92 cents, or 6.28%, to $15.41.

Fad shoewear maker Heelys Inc. also surged Thursday on takeover speculation, with one trader noting the stock has been beaten down in recent weeks because of concern that its shoe/skate combination footwear would wear thin on popularity. The stock (Nasdaq: HLYS) traded up to $27.50 on Thursday but closed at $26.73 for a day's gain of $1.52, or 6.03%.

Hilton bid surprises some

Hilton Hotels had risen along with many other hotel stocks in the wake of the Four Seasons buyout, but several traders said it really had not been a top pick in the group because of its high leverage ratios. On top of that, one pointed to the rising event risk.

"We had started to think Hilton no longer would be a high-probability LBO candidate, with its already high leverage, aggressive capex and little to no free cash flow," he said.

Thus, he said the deal was somewhat of a surprise, and the amount of risk priced into the deal indicates it is considered to be a rocky transaction.

Hilton is being acquired by Blackstone for $26 billion, or $47.50 per share - a 32% premium to Tuesday's close. The stock (NYSE: HLT) ran up to $45.70 on Thursday before easing back to settle at $45.39 for a gain of $9.34, or 25.91%.

Not only did the Hilton deal surprise many players because of the fundamentals in Hilton, but the trader said many onlookers think Blackstone overpaid for Hilton in light of current economic factors.

"Today's oil inventory report shows that demand for oil and gasoline is down. That means that people have curtailed their demand for travel. If that is the case, demand for hotel rooms could also be down," he said. "Blackstone definitely overpaid for Hilton."

Hilton deal lifts other hotels

Several hotels that have been on the rise recently with takeover speculation - InterContinental Hotels Group plc, Starwood Hotels & Resorts Worldwide Inc., Marriott International Inc., Sonesta International Hotels Corp. Wyndham Worldwide Corp. - got another bounce on the Hilton event.

Host Hotels & Resorts Inc., Strategic Hotels & Resorts Inc. and Choice Hotels International Inc. also were higher on the Hilton news. Marcus Corp., which also has movie theaters, was another littler-known mover in that group.

"It was a good day for Hilton and a good day for all the hotels," one trader remarked. "But a lot of premiums are getting pretty tight and in some cases, like Starwood, which is probably the closest comparison to Hilton, there were some people backtracking a little, or at least hedging their bets on the downside."

Starwood (NYSE: HOT) shot up $5.42, or 7.84%, to settle at $74.55. The trader noted that Hilton was bought out at 15 times the consensus Wall Street estimate for 2007 EBITDA and Starwood at $74 was trading around 13 times EBITDA.

"That was starting to look a little tight to some guys, although a lot of analysts think Starwood could get $90," the trader said, but pointed out that the Starwood $70 puts saw heavy open interest, which he thinks is a suggestion that players want to have "a little cushion."

Host Hotels was another this trader thinks has had most of the juice drained. He said his firm sees a buyout value of $28 per share, and the stock (NYSE: HST) surged $2.17, or 9.1%, to close Thursday at $26.01.

A month ago, Marriott surged on takeover chatter beginning in the options market, another trader said. Marriott (NYSE: MAR) gained $3.11, of 7%, to $47.57. The above trader noted that the $50 July call options in Marriott remain strong.

Holiday Inn parent company InterContinental was another big winner in elevated interest from Hilton's buyout, but the first trader noted that it has been moving higher for better than two months on takeover speculation. The stock (NYSE: IHG) added $1.03, or 4.04%, to close at $26.51.

"InterContinental has a lot of upside by our analyst's reckoning," the trader said. "On the valuation implied by the Hilton deal, our guy thinks InterContinental could fetch something approaching $33."

Strategic Hotels, which is a REIT and owns majority stakes in InterContinental Hotels in Miami and Chicago along with a multitude of brands, (NYSE: BEE) gained $1.35, or 6.04%, to $23.70.

Time-share and hotel firm Wyndham has been gaining for a couple of weeks as a two-prong play, the trader continued. It has been thought to be a magnet for a buyout bid, he said, and buying support has been strengthened by less downside since the company decided to begin paying a cash dividend in May. The stock (NYSE: WYN) advanced $1.26, or 3.37%, to $38.69.

In early June, smaller hotel operator Sonesta rocketed on its announcement that it had hired Goldman Sachs to explore strategic options and has steadily gained ever since; before the news, the stock was trading at $23.25. On Thursday, the stock (Nasdaq: SNSTA) rose $1.10, or 3.15%, to$36, but another trader noted that Sonesta is not a very liquid stock as 45% of the float is held by insiders.

On Sonesta, he added that "a lot more risk is getting priced into this hotel stock [Sonesta] than any of the others, including Hilton, so you can take that for whatever it's worth. I think there is some concern that the stock has maybe gotten ahead of itself, that maybe all the premium of a deal has been priced in already."

Another smaller hotel name, Marcus, was one the above trader thought was worth a look, as well, and he said there has been chatter that, in fact, Blackstone or some other private equity firm is eyeing the Milwaukee-based firm. The stock (NYSE: MCS) gained 73 cents, or 3.18%, to $23.72.

"Marcus is an undervalued hotel operation," the trader said. "The firm has a great management team and also has some fantastic high-end properties. There is no way that Marcus should be trading at $23. I could easily see it worth $40 to $50 a share."

Huntsman surges on rivalry

Huntsman's rival proposal from Hexion for $27.25 per share in cash, to best the $25.25 per share offer from Basell, also sent its stock on a tear, but one trader said that there was a line of thinking that Access Industries, owned by Russian billionaire Len Blavatnik, who controls Basell, might step away from the table to focus on Lyondell.

The initial Basell buyout, he noted, put pressure on Lyondell shares as the news was interpreted as suggesting a takeover of Lyondell by Access was less likely. Access has a forward contract to buy 8.3% of Lyondell stock from Occidental Petroleum Corp. and inferred that it might acquire more shares, or pursue a merger, depending on the outlook for Lyondell and the chemical industry.

On the Hexion bid emerging, Huntsman (NYSE: HUN) gained $3.06, or 12.54%, to $27.46.

Lyondell (NYSE: LYO) advanced $1.21, or 3.16%, to $39.50.

"You can tell there are a lot of people betting that there is going to be a bidding war," the trader said. "But we think Basell, or Access, could just as easily walk away."

Basell would get a $200 million break-up fee if its offer is canceled, and Huntsman said Hexion has agreed to pay half of that if its offer is ultimately approved.

The Huntsman board unanimously approved the Basell deal but subsequently decided the Hexion offer could be superior. Under Hexion's offer, Huntsman would receive a $325 million fee if Hexion failed to get regulatory approval or secure financing for the deal, while Huntsman would have to pay a $225 million fee to Hexion if it terminated the deal.

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