Updated from 12:34 p.m. EDT

Starwood Hotels & Resorts


Thursday hatched plans to acquire Le Meridien's brand, which would add another high-end hotel name to its portfolio.

Details of the tentative deal remain murky, and hurdles remain. At first blush, however, it would bolster Starwood's management fees and customer base.

Under a non-binding agreement, Starwood would take over the brand and franchise and management contracts of Le Meridien, a London-based hotel group whose portfolio includes more than 130 luxury and upper-upscale hotels around the world.

The deal rests upon another transaction, however. A

Lehman Brothers


affiliate plans to team with

Starwood Capital Group Global LLC

to acquire 36 owned and leased hotels from Le Meridien. A Lehman affiliate would acquire an additional hotel, the Forte Village in Sardinia, Italy.

Starwood Capital Group is privately held and separate from Starwood Hotels & Resorts, but Barry Sternlicht chairs both companies.

Lehman has invested more than $1 billion in Le Meridien since 2001, giving it effective control over the hotel chain, which ran into trouble during the travel slowdown after the September 11 terrorist attacks. The investment bank has been trying for some time to recapitalize the hotel chain.

An anonymous real estate investor says the Lehman-Starwood Capital joint venture will pump additional equity into the owned and leased hotels, decreasing the leverage that had caused problems for Le Meridien.

In a conference call Wednesday, executives at Starwood Hotels & Resorts declined to provide detailed terms of the transactions and said many details need to be worked out before the expected late June closing date. Vasant Prabhu, the company's CFO, said Starwood would receive back an existing $200 million investment in Le Meridien's debt, but would have to make an undisclosed payment for the chain's brands.

Prabhu acknowledged the cost of bringing Le Meridien into the Starwood fold would prevent the deal from contributing to earnings in its first year.

But he and Starwood CEO Steve Heyer contend Le Meridien makes a strategic fit for the company, whose brands include St. Regis, The Luxury Collection, Sheraton, Westin, and W. Le Meridien's customer base is primarily European, broadening Starwood's roster of frequent customers. And Starwood's existing frequent customers would be able to redeem points at even more resorts.

"We see this as a positive for the stock as its increases Starwood's fee business by a good level (we estimate by 6%)," writes Joseph Greff, an analyst at Bear Stearns, which does and seeks to do business with companies covered in its research reports.

Goldman Sachs' Steven Kent also views the deal as positive because it would increase Starwood's distribution in key overseas cities. In a research note, he expressed concern, however, that Barry Sternlicht's significant stake in Starwood Capital might create a conflict of interest. Goldman does and seeks to do business with companies covered in its research reports.