Debt purchase gives Starwood various options with Le Meridien

White Plains, N.Y.--By purchasing a portion of Le Meridien Hotels & Resorts' senior debt, Starwood Hotels & Resorts Worldwide could be in a position to buy the brand and/or the management contracts of its hotels.

Lehman Brothers Holdings and Starwood acquired all of the outstanding senior debt--about $1.3 billion--of Le Meridien from Merrill Lynch and a group of other banks. Starwood will fund $200 million through a high-yield junior participation in the debt. Also, Starwood made an exclusive agreement with Lehman Brothers for three to six months to negotiate the recapitalization of Le Meridien, according to Allison Reid, v.p. of investor relations for Starwood.

"We're not buying a lot of debt unless we're interested in buying more," Reid said.

Executives of Lehman Brothers and Le Meridien in London could not be reached for comment. Reid said Starwood has various options available, which include buying more or all of Le Meridien's senior or junior debt.

"We're going to spend the next three to six months deciding what model we want to go with," she said.

Le Meridien formerly was owned by Japan-based Nomura International PLC.

The Le Meridien portfolio consists of about 120 upper-upscale hotels, which would complement Starwood's portfolio. The hotels are located mainly in Europe and the Asia Pacific region, where Starwood would like to increase its distribution. Starwood has about 740 hotels in its portfolio, 430 of which are in North America.

Reid said Le Meridien is a perfect fit for Starwood because 70 percent of Starwood's earnings come from North America and 92 percent from the upper-upscale segment, and Le Meridien has many properties in Paris, a market in which Starwood would like to increase its presence.

"Paris is a market we need to be in," Reid said. "The hotel business has gone global, and if you want to be a big player, you need to be global. Le Meridien is already there, and it makes you hit the ground running."

Marc Falcone, lodging and gaming analyst for Deutsche Bank, said the transaction is good for Starwood because it gives it a good return on investment--in the high teens type of interest--and it gives it the lead to acquire the management contracts.

"The Le Meridien portfolio lays [well] over the Starwood portfolio," Falcone said. "It's a play to get the management contracts."

Falcone said Lehman Brothers previously was aligned with Hyatt Hotels Corp. to purchase the debt and do the restructuring. Fairmont Hotels & Resorts and Marriott International were interested as well.

Reid said Starwood bid on Le Meridien two years ago when it was for sale and came in second or third place.

She said the timing of purchasing the debt was good because the hotel industry is coming out of a downturn.

"Hotel fundamentals are getting better," she said.

Reid said Starwood's purchase of the debt was unusual but was done to participate in the recapitalization of Le Meridien. She said the $200 million invested, which came from asset sales and cash flow, was earning low interest and that corporate debt yields higher interest because there's more risk involved.

However, Lehman, which put in $1.1 billion, has the first position, and Starwood has the second.

"The risk is limited because Lehman put in $1.1 billion," Reid said.

"Lehman has tremendous financial interest because they own the mezzanine debt, too," Falcone said.

Reid said ultimately it's Starwood's shareholders who benefit from the wide distribution of the company's hotels.

"We're a real-estate investor, and we buy and sell at the right price," she said.

Reid said it's a possibility that Starwood would buy the Le Meridien brand.

"From a distribution and product standpoint, we're good at building brands," she said. "We have the structure to add value to a brand."

"It's too early to tell if Le Meridien will be a Starwood brand," Falcone said.

jwalsh@advanstar.com

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