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Hilton Hotels, Penn Beaten Up for No Good Reason

Editor's note: "Bricks and Mortar" is a series of columns written by real estate reporter Nicholas Yulico meant to help readers generate real estate and gaming-related stock ideas.

In a curious side effect of the stock market's shakeout this week, two companies that have already agreed to buyouts at hefty premiums have become screaming buys again.

Hilton Hotels (HLT) and Penn National Gaming (PENN) -- two components of the Bricks and Mortar mock portfolio -- have been unjustly beaten down by concerns about financing for their takeovers.

In short, recent financing worries for the buyouts of DaimlerChrysler's (DCX) Chrysler Group and newspaper owner Tribune (TRB) have raised concerns that credit will be much harder to obtain for private-equity giants performing leveraged buyouts. Thus, risk arbitrage spreads are widening for buyout deals already in the hopper.

But Hilton and Penn shouldn't run into trouble.

Hilton, which agreed to a $47.50-a-share buyout by Blackstone Group (BX) earlier this month, has seen its stock fall over the past five trading days on fears about the debt markets. Hilton's stock recently was trading around $44, representing a 7.4% discount to offer price.

The Hilton deal is expected to close in the fourth quarter. Assuming the transaction closes at the end of December, you're being offered an 18.7% annualized return to buy the stock today.

One veteran real estate investment banker says there is zero chance of the Hilton deal not closing. Banks have fully committed to the financing, and even if they can't immediately sell the debt paper, they'll hold on to it in the short-run, the banker says.

There also is "no risk" that Blackstone can't close, he says. Blackstone is in the midst of raising a fresh $10 billion real estate fund and recently sold of most of the assets from its mammoth purchase of Equity Office Properties.

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