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Getting All Aboard the Orient-Express

Despite company denials, a sale could be imminent.

For a dinner to celebrate the closing of a major real estate deal, it's a humble affair: Steve Schwartzman and Barry Sternlicht are sitting down for burgers at '21.' Eating shepherd's pie with them is Andrew Davis, the founder and chairman of privately held Von Essen Hotels, a London company that owns luxury properties in the U.K.

This is a table of giants. Sternlicht is the founder of

Starwood Hotels & Resorts Worldwide

(HOT)

and now the head of a private-equity firm, Starwood Capital Management. Schwartzman is the founder and chairman of the Blackstone Group, the private-equity firm that recently announced its $4 billion initial public offering.

The waiter, an employee of

Orient-Express Hotels

(OEH)

-- the Bermuda-based public company that owns '21' and the company that Sternlicht, Schwartzman and Davis just bought -- brings the check. No mogul makes a move.

Not to worry. Other patrons -- almost the entire congregation -- step into the breach, reaching for their wallets and calling for margin (and more fries). The rush to pick up the tab is so huge that the bill is oversubscribed. Within moments, not only are the burgers (with all the trimmings) paid for, but Blackstone's IPO is secured, and all the rooms have been booked at Sternlicht's Crillon in Paris for the next decade at rates that guarantee steady growth in revenue per available room, or revPAR, a key hotel industry benchmark.

The only question: Where to go for dessert?

The dinner among the moguls at '21' -- an OEH property -- is plausible, and some experts expect salivating to take place once Orient-Express Hotels is sold. Despite rumors and press reports to the contrary, most notably a London

Times

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report that a roughly $3 billion deal had been reached for the sale of Orient-Express Hotels, the company's management has denied even receiving any bids. But a sale of the company has been a topic for months, and the stock has moved up steadily since reports that a deal was imminent first surfaced on March 22.

According to a research report by Gabelli & Co. analyst Amit Kapoor, there is still room to go: With the stock trading at a hair below $60 by midday Friday, Kapoor believes that OEH could -- and should -- fetch as much as $65 to $70 a share. With the announced departures of Chairman James Sherwood and his son, CEO Simon Sherwood, who will depart in August, the stage is set for new management to take on the company.

The trio of rumored takeover artists is an apt one: Sternlicht, now separated from Starwood, has been obsessing over his own five-star hotel, the Crillon in Paris; he has said that he wants to expand his presence in the luxury market. Sternlicht also already owns 4.5% of OEH's stock.

Schwartzman's Blackstone has poured billions into hotel company buyouts in recent years, and is no stranger to high-end properties: In the late 1990s, the investment firm bought the Savoy Group, a small collection of high-end London hotels with the likes of the flagship Savoy and Claridge's. And Davis' Von Essen is no doubt hungry for some of OEH's U.K.-based properties to add to its own collection.

Orient-Express Hotels is worth salivating over, and not just because of the famous burgers at '21.' There are several properties in the Orient-Express stable that are true standard-bearers for the luxury brand. Chief among these are the Cipriani in Venice; the Grand Hotel in St. Petersburg, Russia; and closer to home, the Windsor Court in New Orleans.

Those are just three of the company's 39 high-end hotels in 25 countries that our diners could choose from if they decide on a static sit-down. They could hop aboard some nifty rolling stock -- the namesake Venice-Simplon Orient-Express is one of six luxury tourist trains -- or grab a day cruise on one of the company's two cruise ships. Indeed, if Davis is feeling especially generous, they can all fly off to the destination of their choice using an aircraft supplied by Von Essen Aviation.

Whether a deal is worked out, the current hunger for high-end hotel properties strongly suggests that a buyer that wanted to spin off OEH assets would do well. And just as those sellers might hope for a bidding war over, say, the Cipriani, current OEH shareholders likely expect a bidding war to break out over the stock.

Despite the denials from Orient-Express brass, the likelihood of a sale in the next quarter or two is strong, especially as top management turns over. As Blackstone amply demonstrated with its recent buyout of giant real estate investment trust Equity Office Properties -- it has sold some $18.5 billion of those assets since buying the company for $39 billion in equity and debt in early February -- this is an opportune time to sell high-quality assets at excellent prices.

If Orient-Express' stock is still undervalued, even after the 7% run-up it has experienced in the past two days, savvy buyers will know it. And instead of the cookie-cutter luxury products now being trotted out by Ritz-Carlton,

Four Seasons

(FSH)

and others, OEH's unique properties can command a premium that even the savviest hotel shopper will consider paying.

At the time of publication, Peter Slatin had no positions in any of the stocks mentioned.

Slatin publishes the independent real estate newsletter theslatinreport.com. He has written extensively about real estate and architecture for publications ranging from Barron's to The New York Times, and is on the editorial board of Real Estate Portfolio, published by the National Association of Real Estate Investment Trusts. He was the founder and editor of Grid, an award-winning real estate business magazine.