ITT shareholders put trust in Starwood, Sternlicht

Gary Thompson

Thursday, Nov. 13, 1997 | 11:19 a.m.

NEW YORK -- Rand drew raves, Barry beamed, Steve shrugged and the fat cats sang.

Thus ended ITT Corp.'s 70 years of independence and Hilton Hotels' 11-month quest to buy ITT's Sheraton and Caesars brands, while Starwood Lodging's bid to become the world's biggest hotel company took a giant step forward.

Institutional investors holding the bulk of ITT's shares voted Wednesday to re-elect the company's directors, handing a stunning victory to Starwood and a crushing defeat to Hilton in their rival pursuits to acquire ITT.

Now it's up to Starwood Chairman Barry Sternlicht, the 36-year-old wunderkind of the hotel real estate investment trust industry, to deliver on his ambitious promises.

Vowing to "change the paradigm in the hotel industry," Sternlicht told more than 750 investors and others at ITT's annual meeting that "our operations will be worldwide."

"We'll attack Europe and Asia as we've attacked the United States over the past three years," he said in a speech peppered with military metaphors.

"We'll use positively devastating marketing strengths ... to continue our story of performance," Sternlicht said. "This will be a company that could be potentially lethal."

Lethal, that is, to competitors, not ITT stockholders, he promised, predicting Starwood stock would trade at $75 a share next year. It closed Wednesday at $54.3125 a share, down 93.75 cents.

Since ITT shareholders will receive at least $25.50 in cash plus Starwood stock for each ITT share, the actual value of Starwood's winning $85 bid "should be around $100 per share," he said.

Institutional investors led by Fidelity Management and Alliance Capital bought his prediction, in part, he explained, because they've owned large stakes in ITT and Starwood during the REIT's rapid growth over the past few years.

"They know the fundamentals of Starwood," Sternlicht said after the voting. "We had a competitive advantage because they knew what we've done."

What Starwood has done is expand rapidly due to its "paired-share" REIT status, which allows it to avoid federal income taxes as long as it pays out 95 percent or more of its earnings to shareholders, who are taxed on the distributions.

That status has helped Starwood to become the third largest hotel REIT in the country in less than five years, posting a 75 percent annual growth in return on investment.

It has done so by acquiring top-line hotels, including the Westin brand in a $1.7 billion deal set to close early next year.

If the merger of ITT is also consummated, a move Sternlicht said would be completed by February, Starwood will own or operate through franchise agreements 650 hotels in 70 countries and generate more than $10 billion in annual revenues.

ITT Chairman Rand Araskog drew a standing ovation from the crowd spilling over into five separate meeting rooms in the luxurious St. Regis Hotel in Manhattan.

The investors were acknowledging not only the likelihood that the 66-year-old Araskog was presiding over his last annual meeting after nearly two decades as chief executive of ITT.

They were also applauding the fact that Araskog's controversial defensive strategy against Hilton's hostile takeover attempt had led to a sharp rise in ITT's stock price since last January.

It was a strategy that included components a federal judge ruled illegal and that alienated many in the investment community. But it resulted in a healthy return for ITT shareholders.

The day before Hilton announced its tender offer, ITT shares were trading at $44. They closed Wednesday at $75.3125, down 81.25 cents on the day but up more than 70 percent for the year.

After the ovation, Araskog noted that Hilton President Steve Bollenbach "was the second man on his feet" when an ITT shareholder urged the applause.

Bollenbach, who knew as early as Tuesday evening his efforts to acquire ITT appeared doomed, had just given a rather subdued speech urging the voters to "support Hilton's clearly superior bid for ITT."

He noted that Hilton was ready to pay $2.2 billion in cash more than Starwood's bid, and said the Hilton stock distributed in the second step of the proposed transaction would be exchanged tax-free for shareholders, while Starwood's proposal would be fully taxable to stockholders.

A Hilton-ITT merger would create "hands down the world's greatest gaming and lodging company," the 55-year-old Bollenbach said.

He said Hilton would operate ITT's "fabulous gaming properties." It's expected Sternlicht will put ITT's casinos, including Caesars Palace and the Desert Inn in Las Vegas, on the auction block, continuing the process he began in the frenetic days leading up to Wednesday's meeting.

Sternlicht had offered Caesars and the Desert Inn to several casino operators, hoping to raise additional cash to bolster his bid for ITT in light of Hilton's higher cash offer.

Sternlicht said later that Starwood would "watch the casinos very closely. If they produce the cash flow ITT says they will, we'll be very happy. If not, we'll take a look at what we might do."

Before the vote, Bollenbach said a Hilton-ITT merger "adds up to a unique opportunity."

"But it's your last opportunity," he said. "The auction ends today."

Preliminary tallies indicated holders of about 65 million shares voted for the Starwood-ITT deal, while about 25 million shares were voted in favor of the Hilton transaction.

Fidelity Management portfolio managers split their vote, with 12 million shares cast for ITT and 4 million for Hilton. ITT's second biggest holder, Alliance Capital, cast its 5.7 million votes for the incumbent board.

In one big surprise, Bankers' Trust -- which manages ITT's pension plans -- cast 5 million votes for Hilton. The California Public Employees Retirement System also voted for Hilton.

"I can't say I'm not disappointed," Bollenbach said later. "I think a combination of Hilton and ITT would have been a magnificent company, and I don't think we'll ever have that opportunity again.

"There really are no large hotel companies like (ITT). We'll have to continue buying hotels on a one-by-one basis."

Bollenbach also said Hilton, which has the ability to raise huge amounts of cash, "will look at using our investment capacity to buy back (Hilton) stock."

"Our stock currently trades at multiples below what it costs to buy hotels. So buying our own stock is like buying hotels. It's the best way to send money back to our shareholders."

Bollenbach, who shook Araskog's hand after the meeting and apologized for calling the ITT chief a "weenie" for refusing to negotiate, was philosophical about the loss.

"Sometimes the best deals are the ones you don't get," Bollenbach said.

Hilton would consider buying ITT's gaming assets if Sternlicht wants to sell them, Bollenbach said.

"I think Barry would want to talk to us. In fact, I know he would, because we're very good friends."

But he ruled out any future attempt to acquire ITT, even if the Starwood deal falls through.

"You can come up with all kinds of scenarios," he said. "But only a dramatic reduction in Starwood's stock price would let someone come in with a cash bid.

"In the real world, we're not going to be in a bidding contest with Starwood. Our offer is gone."

Bollenbach vowed to continue lobbying for congressional review of the tax advantages paired-share REITs such as Starwood have over traditional owners of hotel properties and gaming casinos.

"It's a really nifty tax loophole," he said, "but I think that loophole will go away."

Sternlicht said such structures add stability to the real estate industry and help "smooth out the cycles" that affect it.

"The more we tell our story in Washington, the better off we'll be," he said.

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