An American real estate firm in Paris

Every so often in real estate, an investment is more than the sum of its parts. When a firm acquires a building like the US Bank Tower in Los Angeles, it gets a lot of square feet of office space—as well as the tallest building on the West Coast. Investing in the Hancock Building in Chicago, a firm adds a mixeduse asset and a large chunk of the Midwestern metropolis' famous skyline to its portfolio. Sometimes it is hard to put a price on the panache that exists in a property—be it the tallest, most distinct or most luxurious.

But when it comes to one of the most famous— and luxurious—hotels in the world, there is a price: $3.2 billion.

That was the amount paid last summer by Starwood Capital in its acquisition of the extensive hotel portfolio and luxury brands of the French holding company Groupe Taittinger, including its crown jewel: the six-star Hotel de Crillon, one of a handful of “palace hotels” in Paris. Yet, as Starwood has since revealed, there may be more to the Crillon than just a luxury hotel on the Place de la Concorde—the private equity real estate firm recently announced that it hopes to turn the Crillon name into an international luxury hotel brand.

The Crillon has a rich history going back centuries, something the hotel has already developed into a successful marketing angle. Commissioned by French king Louis XV and built in 1758 from blueprints drawn up by famed architect Jacques-Ange Gabriel, the hotel's historic building was originally the residence of Duc d'Aumont, the French ambassador to England and a member of the king's court, and was later acquired by the Comte de Crillon in 1788.

The Crillon family used the property as a family home until 1907, when it was sold to the Société des Grand Magasins et des H^tels du Louvre and turned into a hotel, opening its doors to affluent guests in 1909. The hotel was later acquired by the famous Taittinger family, purveyors of luxury goods, including their namesake champagne line. Last year, the family put Groupe Taittinger on the auction block.

Starwood, which has extensive experience in the hotel industry due to its founder Barry Sternlicht's role as former chairman and founder of Starwood Hotels & Resorts, was no doubt most interested in Société du Louvre, the Groupe Taittinger affiliate that owns a portfolio of 14 luxury hotels in France, Switzerland and Germany—including the Crillon, Paris' Lutétia and the Hotel Martinez in Cannes, as well as the second-largest economy budget hotel brand in Europe.

As part of the deal, Starwood also acquired a number of non-real estate assets as steeped in history and tradition as the Crillon. These include Taittinger CVCC, the world's sixth-largest champagne producer and a 272-year-old French institution; Baccarat crystal, which has adorned the table of Louis XVIII and the Prince of Wales; and the Annick Goutal perfume producer.

NUTS AND BOLTS
Starwood clinched the deal last July in a transaction valued at approximately €2.5 billion ($3.2 billion). Starwood paid €760 million for a 65 percent share of Taittinger—and with that a 44 percent stake in Société du Louvre—as well as paying an additional €355 million for another 21 percent share of the hotel group.

Though Starwood is more interested in Société du Louvre's luxury brand division, Concorde Hotels, which accounts for approximately 25 percent of the company's 66,834 rooms, it has been the economy division that has generated superior performance in recent years. While room volume at Concorde has remained level in recent years, it has steadily increased in the economy division. Société du Louvre's revenue per available room (RevPar)—a common metric in the hotel business—in its luxury hotels has mirrored international lodging trends with a significant drop-off after the highs of 2000. Nevertheless, unlike the statistics for US chains, RevPar at the Société du Louvre hotels has yet to come back; it remains at a sluggish €134.5, down from €160.5 in 2000.

Despite this performance, many players close to the transaction have pointed out the speed at which the auction took place, which some feel was Taittinger simply taking advantage of the high interest in the properties. It comes as little surprise, considering the liquidity in the market and the strong interest in hotels as the sector rebounds.

Competing bids were placed by a number of US and European investors, including the real estate arm of private equity firm The Blackstone Group, which has made a number of bets across the hotel sector in recent years—including a group of luxury hotels in London.

come back; it remains at a sluggish €134.5, down from €160.5 in 2000. Despite this performance, many players close to the transaction have pointed out the speed at which the auction took place, which some feel was Taittinger simply taking advantage of the high interest in the properties. It comes as little surprise, considering the liquidity in the market and the strong interest in hotels as the sector rebounds. Competing bids were placed by a number of US and European investors, including the real estate arm of private equity firm The Blackstone Group, which has made a number of bets across the hotel sector in recent years—including a group of luxury hotels in London. Mark Wynne-Smith, European chief executive officer for Jones Lang LaSalle Hotels, says in a deal like Taittinger, the ability to write the check is important—but so is the ability to fully understand the financials on a somewhat complicated and fast-moving deal.

“It was not unduly complex,”Wynne-Smith says. “It was more the speed in which the auction was held that made it complex.”

Even Starwood, which was reluctant to discuss the deal, admitted that the transaction came fast.

“As deals of this size go, it went quickly,” said Robin Josephs, a managing director at Starwood Capital Group.

To help finance the deal, Starwood approached possible coinvestors last fall, including CalSTRS and the Oregon State Board of Investment. CalSTRS committed $100 million to the joint venture, while Oregon considered a $25 million co-investment along with its commitment to Starwood's latest hospitality-focused fund, Starwood Hospitality Fund I, which closed on $900 million.

There was some speculation that complications could have arisen from the involvement of the Taittinger family—a reported 35 family members have managed or consulted for the company at one time or another. And as one person close to the deal put it, the Taittingers were more concerned with preserving the status quo, rather than driving shareholder value.

Russell Sternlicht, the younger brother of Barry Sternlicht who is reportedly heading up the Taittinger investment, echoed that sentiment, recently telling Forbes: “The Taittingers have accumulated great assets. They are not great corporate managers.”

Press reports swirled about the family's involvement, or lack thereof, in the sale, but Wynne-Smith points out, “It was very clear when the auction was going on, the family was behind it.”

Still, there has been plenty of behind-the-scenes jockeying in the intervening months, with two family groups eyeing the group's nonhotel assets: matriarch and Taittinger's managing director Anne-Claire Taittinger and French bank Crédit Agricole are in one corner, challenged by Belgian billionaire Albert Frère with Oierre-Christian Taittinger, another family member and the mayor of the 16th arrondissement in Paris. Champagne and luxury goods company LVMH and independent champagne house Louis Roederer, producer of Cristal, are also expected to make bids for the champagne assets, which are reportedly valued at more than $900 million.

The sale of the non-core businesses is something Starwood was considering well before the firm clinched the deal. Even in the press release announcing the transaction, the issue was broached. “We welcome the Taittinger family's advice and counsel as we work to ensure that the company's prized champagne business finds an appropriate home,” noted Sternlicht.

Documents recently released by the California State Teachers Retirement System (CalSTRS) also illustrate Starwood's strategy in regards to the non-core businesses: “[Starwood] is capitalizing on a ‘wholesale to retail’ opportunity by buying the company at a price below anticipated proceeds from the sale of its individual components.” In information given to Starwood investors, the deal was expected to produce a gross IRR of 25 percent and net returns of 20 percent.

Though the stakes are high for Starwood, they may be equally high for the French government—even French President Jacques Chirac has gotten involved. According to Forbes, the politician met with Anne-Claire Taittinger last fall to throw his support behind her consortium and block any potential deal with Frère. The French government has often exerted influence over foreign M&A activity, evidenced recently by its rumblings about the takeover of venerable French food conglomerate Danone by US beverage company PepsiCo.

BRAND CONSCIOUSNESS
In late January, Starwood announced its plans for the part of the Société du Louvre acquisition it seemed to value most: it would parlay the Hotel de Crillon into its own international line of highend luxury hotels.

Given the history and stature of the Crillon hotel, using it as the basis for a luxury chain seemed like a natural progression. In fact, the firm was thinking about the creation and development of the Crillon brand even as it was eyeing the property, according to Starwood's Josephs.

“The Taittingers have accumulated great assets. They are not great corporate managers.”

Starwood says the new Crillon brand will build upon the reputation of the flagship hotel; the firm is already working on possible sites for expansion, including world-class cities like London, Rome, Barcelona, New York, Los Angeles, China, Las Vegas, Tokyo, Shanghai, Beijing, Hong Kong, Delhi, Mumbai and Dubai.

But it isn't just big-city hotels that could fall under the Crillon banner, according to Starwood. Resorts—in the Caribbean, Far East and skiing destinations like California's Mammoth Mountain—might not be far behind. The latter would provide a natural synergy, as Starwood acquired the ski resort in a $365 million transaction last year.

The private equity real estate firm has also indicated there could be synergies between the new hotel brand and the other luxurygoods it acquired in the deal. These plans, the company said, could include a “Baccarat-inspired bar” or a “Taittinger Champagne Lounge.”

In addition to these top-flight amenities, the Crillon is also known for its food; the hotel's Les Ambassadeurs restaurant and its chef Jean-Francois Piege, as well as affiliated three-star chef Guy Martin, of Paris restaurant Le Grand Véfour, have been much trumpeted by Starwood, which plans to make world-class chefs an important part of the new line.

This sort of brand-building and expansion is something that Sternlicht has done successfully in the past, with both the St. Regis and W Hotel chains. When he was chief executive officer of Starwood Hotels & Resorts, Sternlicht took a single St. Regis property acquired with the ITT deal in 1998 and grew it into twelve branded hotels; he also brought the boutique hotel concept to the masses with the W chain, which he developed from scratch.

“The luxury travel market is one of the fastest growing segments in the industry,” Sternlicht said in a statement. “None of the existing luxury hotel brands are offering the style of European luxury and class that we have envisioned and that the Hotel de Crillon in Paris has been providing for nearly a century.”

Speaking to Private Equity Real Estate shortly after the close of the deal, Sternlicht said that the plans for the Crillon would be different from his other successful chains like the W hotels, even if the strategy is somewhat similar. “You can expect that I would stay in the design world,” he said at the time. “And it won't be ‘me-too’ product. We try to do stuff that is differentiated and we'll use that same strategy at SDL.”

For instance, the company has noted that the new brand will focus on properties unique to the cities it expands to, while incorporating the trappings of a French luxury hotel. It is a strategy that industry watchers feel will ultimately be successful.

“One thing Barry has got is a rapid vision,”Wynne-Smith notes. “While they bought [Société du Louvre] based on where it is today, they had an idea of where they could take it.”

Still, one obstacle for the new brand will be finding similar properties in the international cities pegged for Crillon's expansion. “The hotel itself—in terms of physical product—is certainly the leader in the Paris market,”Wynne-Smith says. “The challenge will be finding product that is complementary.”

But as Starwood looks to develop the new Crillon brand, there is another aspect of the Taittinger deal that already has excellent penetration throughout Europe. While not as sexy as the Hotel de Crillon in Paris or the Martinez in Cannes, Société du Louvre's economy hotel brands could be a profitable platform for Starwood.

Wynne-Smith notes that the economy lines are valuable assets and well-positioned throughout Europe, being the second-largest budget hotel chain in the region. The deal included 805 hotels throughout the continent under the Première Classe, Kyriad and Campanile banners, representing more than 51,000 rooms.

“The workhorses are more volume driven, but they have as much potential as the headline-grabbers,” he says.

Given the variety of assets that Starwood acquired—and Sternlicht's plans for them—the firm could be grabbing headlines for years to come.