Blackstone Lands Hotel Titan Hilton

Hilton's Waldorf-Astoria Hotel in New York City, once the largest hotel in the world.

Less than two weeks after recording the largest U.S. IPO in five years, private equity firm Blackstone Group (NYSE: BX) has struck a deal to acquire Hilton Hotels Corp. (NYSE: HLT) in an all-cash deal worth about $26 billion, including debt.

Under terms of the agreement, Blackstone's real estate and corporate private equity funds will pay $47.50 per share for all of Hilton's outstanding stock, a 32% premium over Tuesday's closing price.

Hilton's Board of Directors approved the deal Tuesday. It is scheduled to close during the fourth quarter, subject to approval by Hilton's shareholders.

"We think the pricing on this deal maximizes shareholder value," Hilton co-Chairman and CEO Stephen F. Bollenbach said in a conference announcing the deal.

He called the pricing "strong compared to other deals."

Beverly Hills, CA-based Hilton owns or operates a global empire of more than 2,800 hotels and 480,000 rooms. Its brands include Hilton, Doubletree, Embassy Suites, Hampton Inn, and the luxurious Waldorf-Astoria.

Hilton is the second largest hotel chain in the U.S. behind Marriott International.

Led by billionaire Stephen Schwarzman, Blackstone is adding to its existing portfolio of more than 100,000 hotel rooms in the U.S. and Europe. The firm has heavily invested in the hospitality sector, striking deals for MeriStar Hospitality Corp., LaQuinta Inns, LXR Luxury Resorts and Hotels, Wyndham International, Extended Stay America and others, although the Hilton deal is the largest by far.

Blackstone agreed in April to sell the Extended Stay chain, comprised of 76,000 rooms, to The Lightstone Group, a private real estate firm based in New Jersey, for $8 billion.

In a statement, Blackstone said the Hilton buyout is "an important strategic investment" and that it doesn't plan any significant divestures.

"We are committed to investing in the company and working with Hilton's outstanding owners and franchisees to continue to grow and enhance the business," said Michael Chae, a senior managing director with Blackstone's corporate private equity division.

Blackstone has invested $1 billion in redevelopment capital in its LXR properties over the past three years, and has grown the LaQuinta brand by almost 50% since its acquisition in January 2006.

The hospitality sector recorded record investment sale activity last year, with $70 billion in worldwide transactions according to Jones Lang LaSalle Hotels, and the industry is projected to post a record $29.7 billion in income before taxes this year, according to PricewaterhouseCoopers LLC.

Last month, hotel owner Equity Inns (NYSE: ENN) agreed to a takeover by Whitehall, Goldman Sachs' real estate fund, for $2.2 billion, or $23 per share in cash.

Other hotel-chain acquisitions over the past year, fueled by strong industry fundamentals following its post-9/11 recovery, include Four Seasons Inc., CNL Hotels & Resorts, Winston Hotels, Fairmont Hotels & Resorts, and Boykin Lodging Co.

But the Hilton buyout exceeds the combined total of those six deals by more than $10 billion.

In February, Blackstone paid $39 billion to acquire Chicago-based REIT Equity Office Properties Trust (EOP) and its massive U.S. portfolio of Class A office properties. Since then, the firm has aggressively flipped former EOP assets city-by-city to a crowd of institutional investors in major markets including New York, Chicago, Los Angeles and Seattle.

Bear Stearns, Bank of America, Deutsche Bank, Morgan Stanley and Goldman Sachs served as financial advisors to Blackstone and provided financing. UBS Investment Bank and Moelis Advisors acted as financial advisors to Hilton. Legal advisors were Simpson Thacher & Bartlett LLP for Blackstone and Sullivan & Cromwell LLP for Hilton.