The Top 10 Most Likely Hotel Takeover Targets - TheStreet

The Top 10 Most Likely Hotel Takeover Targets

Hilton's gone; who's next?
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It's very bullish for investors that Blackstone (BX) - Get Report is buying Hilton Hotels (HLT) - Get Report for $47.50 in cash. For one thing, that price values Hilton at 16x Ebitda, which in other words is roughly 16 times cash flows. (Hilton was soaring over 26% on the news; Blackstone was up 2.5%.)

Over the past year deals have been more likely to occur at 10x to 12x Ebitda. The higher the multiple, the more difficult it is for the buyout firm (in this case Blackstone) to pay down the debt it takes on to make the purchase. The fact that

this $26 billion deal is occurring at 16x Ebitda shows that private equity firms are willing to bear additional risk to win deals. Who benefits? Public stockholders. Let's not forget there is $1 trillion that needs to be put to work.

With Hilton being bought it makes sense to look at the other hotel companies with good balance sheets and decent earnings growth that are trading for less than 15x cash flows. Stocks that meet these characteristics are all now buyout candidates. If they don't get bought, it's highly likely the stock price goes up beyond a 16x multiple or more. At Stockpickr, we put together the

Hotel Takeover Targets

portfolio looking for companies with the above criteria plus any other advantages like insider buying, a good return on equity, etc.

First on the list is

Wyndham Worldwide

(WYN)

. With an enterprise value of $9.7 billion and Ebitda of $837 million, the hotel company trades for just 11.6 times Ebitda. Wyndham owns 6,500 franchised hotels plus various other vacation resorts, rental properties, luxury clubs, etc.

People also don't realize the impact that an aging baby boomer category is going to have on second home ownership at vacation resort clubs. Wyndham is big in this category and also offers financing for vacation home ownership.

This appeared in the

Barron's Summary portfolio

from June 11:

Wyndham was spun out by Cendant last August, coming public at about $32 a share. It now trades for 35 and change and has a market value of $6.5 billion, though some fans are betting it's worth closer to 60 a share. "It's new, underappreciated and underfollowed," says Walter Scully, an analyst at Putnam Investments, which loaded up on Wyndham shares late last year.

I also like that Wyndham insider Stephen Holmes has gone into the open market and bought $1.5 million worth of shares for himself at $36.20 per share. This transaction occurred on May 15, 2007.

Want more? Check out TheStreet.com TV video. Brittany Umar discusses which of the next hotel takeout stocks is most likely to be taken over.

Next on the list is

Harrah's Entertainment

(HET)

, the hotel and casino operator, even though it has already agreed to be bought in a private-equity transaction for $90 per share. The market has been skeptical of the deal closing by year-end because of concerns about financing.

However, this Hilton deal makes it clear the Harrah's deal will close as quickly as possible. If the deal closes by year's end, then the current return from here is 5.5%, or an annualized spread of 11%. Given that this deal is a lock, a safe, annualized return of 11% is a much better use of cash than a T-bill or any other equivalent fixed income investment.

With a $27 billion market cap and $2.5 billion in Ebitda, the company trades at just 11 times Ebitda, so even if a deal were to fall through it's highly likely another deal would occur even at a higher price than $90. Analysts expect Harrah's multiple to improve, with estimates on earnings per share going to $4.38 in 2008 from $3.75 in 2007 and analysts also expecting revenue to improve to $10.91 billion in 2008 from $10.44 billion in 2007. On July 1, various directors bought shares at $85.34 per share.

The most recent

Barron's

offered a

list of companies, including Harrah's

, that offer attractive spreads if the deals they are involved in occur. This list includes Sam Zell's acquisition of

Tribune

(TRB)

, which has over a 20% annualized spread right now as investors worry the deal will not close by year's end.

For the rest of the top 10 Hotel Takeover Targets, including

Starwood

(HOT)

,

MGM Mirage

(MGM) - Get Report

and others, plus analysis, check out the

Hotel Takeover Targets

portfolio at Stockpickr.

At the time of publication, Altucher and/or his fund had no positions in stocks mentioned, although positions may change at any time.

James Altucher is president of Stockpickr LLC, a wholly owned subsidiary of TheStreet.com and part of its network of Web properties, and a managing partner at Formula Capital, an alternative asset management firm that runs a fund of hedge funds. He is also a weekly columnist for

The Financial Times

and the author of

Trade Like a Hedge Fund

,

Trade Like Warren Buffett

and

SuperCa$h

. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;

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