Starwood Climbs on Zell News

Shares of Starwood Hotels & Resorts (HOT) are kicking off the new year by climbing approximately 15% in Friday's trading. The jump is not related to strong occupancy trends over the holiday, however. Rather, the shares have rallied after it was revealed that the company had signed a confidentiality agreement with Equity Group Investments, LLC, or EGI, the investment firm controlled by billionaire real estate mogul Sam Zell.

According to SEC filings, EGI currently owns approximately 8.1% of the outstanding shares of Starwood. The confidentiality agreement, signed on December 29 and filed on December 31, calls for Starwood to share certain confidential information about the company with EGI. Additionally, the agreement places restrictions on Starwood’s use and disclosure of its confidential information and limits Starwood’s ability to effect a change in control.

Confidentiality agreements are often seen as signs of a potential future acquisition. As such, speculation that Mr. Zell may increase his stake in Starwood is driving the share price higher. Mr. Zell is an historic figure in commercial real estate, and investors have long paid close attention to his moves within the sector. Visible support from high-profile value investors could be interpreted as a potential catalyst for stocks within the hotel sector. We believe that such support could help limit further meaningful declines in hotel stocks, as capital flows may increase to the group.

However, absent changes to the current operating environment and credit market situation, we would not expect it to spark a material long-term rally. We note that fundamentals in the sector remain extremely challenging. We expect continued occupancy declines in the hotel industry throughout 2009, and anticipate that the ability to of owners and operators to maintain room rates as much as possible will be the key to an eventual rebound.

We currently have a Hold rating on shares of Starwood, with a price target of $20.00.

Comments

[fatcat:]

Starwood debt levels are a continuing problem,same as other hotel groups.Most corps are cutting travel for business and with the stressed consumer,I don't see anything good here for a long while.

Jan 04 10:09 AM