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Is Starwood Hotels a ‘HOT’ Takeover Prospect?

Global hotel giant Starwood Hotels & Resorts may have moved one step closer to going private. Lodging analysts are buzzing about this prospect after the sudden departure of Starwood CEO Steve Heyer earlier this week.

To be sure, Starwood was already rumored to be a prime takeover candidate before the weekend. But outgoing CEO Heyer had resisted the idea of selling the company, which suggests to analysts that the White Plains, N.Y.-based hotelier (NYSE: HOT) may now be more amenable to a buyout.

Starwood owns and manages more than 850 hotels in roughly 95 countries. The company was formerly a REIT, but in 1998 then-CEO Barry Sternlicht restructured the company as a C-Corporation.

On Monday, Starwood’s board cited Heyer’s “rough management style” as the impetus behind his sudden departure. Heyer joined Starwood two and a half years ago. The executive left Atlanta-based soft drink maker Coca-Cola after being passed over for the CEO post in 2004. Last year, Heyer publicly sparred with Starwood’s hard-charging founder Barry Sternlicht, who felt that Starwood was selling assets below market value.

During an impromptu Monday morning conference call announcing Heyer’s departure, interim Starwood CEO Bruce Duncan offered a vague response to a pointed question about going private.

“We believe the company is doing very well. As a fiduciary, we take our duty very seriously and are going to be focused on maximizing shareholder value, and the best way to do it we think is to remain an independent company. But that could change and we are a fiduciary,” said Duncan. It’s unclear what precisely Duncan meant by “independent,” and calls to clarify the remark weren’t returned in time for this article.

Regardless of the management tumult, Starwood performed well on Heyer’s watch. Buoyed by its disposition campaign and strong industry-wide demand for rooms, Starwood has generated handsome revenue growth in recent years. In 2006, the company reported net income of roughly $1 billion compared with $422 million in 2005.

Last year, Starwood sold 33 hotels for roughly $3.6 billion, and 14 additional properties were still on the market in mid-March. Management and franchise revenues also increased by 54% between 2005 and 2006, reports the company.

That growth story isn’t expected to change. Lodging analyst Amit Kapoor of Gabelli & Co. believes that Starwood will post another solid year of revenue growth in 2007. The analyst writes in a Monday research note that “fundamentals remain unchanged at HOT” despite Heyer’s abrupt departure.

“[Starwood] offer investors a combination of a well-known stable of lodging brands, strong rate-driven RevPAR growth and international expansion opportunities,” writes Kapoor.

He also notes that “strong private equity interest in the lodging sector combined with this management change” would fuel added speculation about a takeover of the company.

If Starwood were ultimately bought out, it would be following in the footsteps of several other large public hotel firms. Sporadic reports that Starwood was fielding unsolicited takeover bids began in earnest last summer.

A series of large 2006 hotel mergers, among them The Blackstone Group paying $2.6 billion for REIT MeriStar Hospitality Corp in February 2006, only fanned such rumors. Incidentally, Blackstone has several billion dollars in ready funds available to do deals. It’s also raising more money each week, say observers.

The privatization wave continued to crest during the first quarter. In March, Hilton Hotels sold its Scandic chain to a Swedish private equity firm for roughly $1.1 billion. Las Vegas casino owner Riviera Holdings Corp. also received a $336.5 million bid from a group of private investors last month.

Bjorn Hanson, leader of PricewaterhouseCoopers’ leisure and hospitality practice, projects that 2007 should produce as many as five privatizations in the hotel sector. Hanson expects this level of activity to match the 2006 volume. He also expects to see some hotel IPOs during the year, which would also be consistent with the 2006 market.

Despite Starwood’s management shakeup, observers like Kapoor of Gabelli expect the company to benefit from Heyer’s departure. Shares in Starwood have validated that view since the announcement: The value of Starwood shares has increased from roughly $67 on Monday morning to $70.86 at the end of trading Wednesday.

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