Hilton Takes a Punch from Starwood, But It's Far From a Knockout

Hilton has settled a lawsuit from competitor Starwood over alleged corporate espionage. Hilton has agreed to end its presence in Starwood's main market for two years.
Hilton has settled a lawsuit from competitor Starwood over alleged corporate espionage. Hilton has agreed to end its presence in Starwood's main market for two years.

In a bruising blow to its reputation, Hilton Worldwide on Wednesday said it has settled a corporate-espionage lawsuit from rival Starwood Hotels & Resorts Worldwide. Starwood claims that two former employees stole more than 100,000 documents to help Hilton start a competing hotel chain called Denizen, which Starwood alleges is a ripoff of its own popular W hotels.

As part of the settlement, Hilton will be forced to step away from the so-called "emerging lifestyle" market for two years. This market is loosely defined by hot, trendy hotels with a bit of edginess to their decor and, usually, a destination bar, analysts say. Starwood has a big presence in the lifestyle market, which accounts for roughly 1% to 2% of the $140 billion hotel industry, analysts say.

Hilton's absence from the lifestyle market for the next two years will give competitors like InterContinental Hotel Group's (IHG) trendy Hotel Indigo, Marriot International's (MAR) Edition and Richard Branson's up-and-coming Virgin Hotels a chance to grab more market share. And, of course, it also could give Starwood (HOT) more time to expand its footprint.

But these punches to Hilton's business won't result in a financial knockout, analysts say.

Bruised But Unbowed

For starters, a two-year prohibition of virtually anything is no big deal in the slow-moving hotel industry, especially compared with the fast-paced, break-neck speed of the technology industry. As it is, the industry expects only a 0.5% increase in the number of hotels built next year over last year -- down significantly from the historical average of a 2.5% increase, says Robert Lafleur, an analyst with Hudson Securities.

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"There's only a few hotels that are going to be built in the next two years anyways," he says. "Is this settlement great for Hilton? No. Does it seriously damage their future? No. Will it kill them? No."

What Hilton lacks in the lifestyle category, where it has barely dipped its toe in the pool, it makes up for in the other hotel markets, analysts say. It has plenty of properties that range across the price spectrum from modestly priced to moderately priced to high-end.

Starwood, by comparison, is largely a player in the high-end hotel market, Lafleur notes. And the boutique -- or niche -- market that Starwood dominates is only expected to grow to maybe 3% to 4% of the total hotel market in the next five years, says Patrick Scholes, a gaming and lodging analyst with FBR Capital Markets.

The hotel industry saw business start to pick up around the end of the first quarter this year, and analysts forecast even greater demand -- and resulting higher room rates -- next year. In this growing market, Hilton will likely have plenty of opportunities to grab investors' attention, even without its lifestyles business.

After all, hotel stocks have jumped an average of 50% to 60% so far this year, Scholes points out. And while he expects the growth rate to slow to roughly 10% to 20% in the new year, he notes the potential for faster growth as well.

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