Real Estate Tycoon Sam Zell Sees Value in Starwood Hotels & Resorts

Speculation arose Friday that Sam Zell may be positioning himself for a takeover bid for Starwood Hotels & Resorts, one of the world's largest hotel and leisure companies, after it was revealed in a regulatory filing that the company signed a confidentiality agreement with the Chicago real estate billionaire. This prediction mat prove to be premature, as Zell first emerged as a buyer of Starwood shares one year ago, according to the original Schedule 13D filed with the SEC last February:

• Between October 2, 2007 and January 31, 2008, SSE acquired 14,750,000 shares of Common Stock in open market purchases in a price range from $39.63 to $62.37 per share. The average purchase price per share was $49.97, for a total purchase price of $736,997,526.78.

Although Zell is not infallible, he recognizes value. Starwood operates well-known brands such as Sheraton, Westin, Le Méridien, and St. Regis in some of the biggest cities, including Mexico City, New York, Paris, Shanghai, and Tokyo.

Due to global economic concerns, Frits van Paasschen, Chief Executive Officer of Starwood Hotels, told analysts on the third-quarter 2008 earnings call that revenue per available room (RevPAR) is expected to decline five percent in 2009. Occupancy rates are running at about 65 percent.

Starwood is well positioned to work through the current slowdown, as most of the $3.6 billion in long-term debt is structured with staggered maturities running from 2012 -- 2012. The company also has an impressive growth pipeline of approximately 470 hotels (110,000 rooms under development), with 70 percent in the luxury segment.

Frits van Paasschen said on the call that an internal 'sum-of-the-parts' analysis pegged the value of Starwoods at approximately $67 a share -- about $8 a share for the vacation ownership unit, $21 a share for the owned hotel portfolio, and $38 for the management fee business. Given current market conditions, this valuation, in my opinion, is too high: defaults on vacation unit ownership are up to six percent and the average price per time-share unit sold year-on-year has collapsed 25.4% to approximately $19,000; hotel room valuation assumes annual RevPAR of four percent, which could prove to be optimistic in the current deflationary environment.

Nonetheless, the company has a proven track record of unlocking the value of its real estate holdings. Add property magnate Sam Zell in the mix -- and there could soon be a "No Vacancy" signs on the doors at Starwood Hotels & Resorts.