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Starwood needs to act
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November 3, 1997: 6:05 p.m. ET
Hilton's offer may lead to revised bid by white knight, investors say
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NEW YORK (CNNfn) - Now that Hilton Hotels Corp. has upped the ante in the high stakes poker game for ITT Corp., investors expect rival suitor Starwoood Lodging Trust to sweeten the pot even further with a revised bid.
Starwood, which surprised Hilton last month with a $13.3 billion friendly offer for ITT, got a jolt of its own Monday when Hilton raised its offer to $80 a share. While still less than Starwood's $82 a share offer, the Hilton bid offers ITT investors more cash up front, a ploy which some experts feel may give Hilton an edge next week when shareholders vote on the proposed deal.
"I would vote for the Hilton deal," Mario Gabelli, chairman of Gabelli Funds Inc., told CNNfn.
"At this point, Hilton has the superior bid. Essentially, Starwood would have to change their mix," the well-known investor said during a telephone interview. Gabelli owns 2.4 million shares of ITT.
Hilton's latest offer represents an opportunity for ITT's shareholders to receive $44 a share in cash as opposed to Starwood's bid, which would yield $15 a share in cash. The significance is Hilton's lesser stock portion would shield investors from the market's volatility.
Yet, as a result of Starwood's unique tax structure, most people in the financial community predicted the real estate investment trust has the financial leverage to emerge with a counteroffer.
"We haven't heard the last of it. We haven't heard the response from the Starwood folks," said John Rohs, analyst at Schroder & Co.
The so-called "paired-share" structure allows Starwood to get around the Tax Reform Act of 1984 and reduce their corporate tax obligations.
"I'm convinced Starwood's going to raise their bid. Starwood has a lot more wiggle room, a lot of flexibility to go beyond $82 a share," said James Murren, hotel analyst at Deutsche Morgan Grenfell (DMG).
To be sure, the competitive advantage that favors Starwood could also jeopardize that very benefit, said Bruce Turner, analyst at Salomon Brothers.
Because the "paired share" status favors REITs over traditional hospitality and gaming concerns, an intense lobbying effort -- led by Hilton's Stephen Bollenbach and Marriott International Inc.'s J.W. "Bill" Marriott Jr. -- has been launched to scrutinize the structure.
Indeed, Starwood hinted that it doesn't want to provoke further scrutiny during a recent 8-K filing with the Securities and Exchange Commission.
Starwood will not "take or omit any action that would reasonably be expected to cause the trust to cease to qualify" as a REIT, according to the SEC document.
"A challenge to the 'paired share' structure may kill the Starwood deal," said Bruce Turner, analyst at Salomon Brothers. "They correctly recognize that the last thing they can do is jeopardize that status."
Yet, the concern of additional scrutiny isn't likely to lead Starwood to walk away from the table, investors and tax professionals agreed.
"It's pretty unusual for Congress to revisit something passed by a prior Congress," said Robert Willens, analyst at Lehman Brothers.
DMG's Murren estimated the REIT would be able to afford between $87 and $88 a share -- which, in Gabelli's view, is closer to the actual enterprise value of ITT.
The renowned investor emphasized that Starwood doesn't necessarily need to raise its entire offer.
"They just have to increase the cash portion of the bid. They have to change the mix," Gabelli said. Hilton launched its bid for ITT more than nine months ago.
-- by staff writer Robert Liu
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