REAL ESTATE TRUST TO BUY HOTEL RIVAL.

Byline: Bloomberg News

Patriot American Hospitality Inc. agreed to buy Interstate Hotels Corp. for $2.1 billion in cash, stock and assumed debt, giving it more upscale hotels to help build up the Wyndham brand as a flagship.

The real estate investment trust will pay $37.50 a share in cash and stock and take on $785 million in debt. Interstate is the nation's largest independent hotel operator, with 222 hotels and resorts with 45,000 rooms.

The purchase is the biggest yet in Chairman Paul Nussbaum's $5 billion buying spree that will give Patriot 455 hotels, up from 45 just a year ago. Now, the company will focus on expanding the Wyndham chain, which it is acquiring in a separate purchase.

``They have moved into a cycle where the flagship needs to be developed,'' said Paul Keung, an analyst at Deutsche Morgan Grenfell who rates Patriot a ``buy.''

Shares of Pittsburgh-based Interstate fell 13/16 to 35 15/16 in midafternoon trading of 1.3 million, 18 times the three-month daily average. The stock had jumped 17 percent the past month on takeover speculation. Patriot's shares fell 13/16 to 30-3/4.

The purchase is the latest in a record year for the industry. About $43 billion in acquisitions have been announced this year, said Arthur Adler, a partner at Coopers & Lybrand LLP's lodging and gaming group. That eclipses the $8.8 billion in completed sales last year.

The buying has been sparked by real estate investment trusts such as Patriot American with a special tax structure. REITs, which own commercial real estate, can shelter some income from taxes if they pay out 95 percent of net income as a dividend.

Patriot is one of four REITs that can also operate other businesses, such as hotels. That allows their shares to trade at a higher multiple to cash flow, giving them a strong currency for acquisitions. Another so-called paired-share REIT, Starwood Lodging Trust, used its stock to outbid Hilton Hotels Corp. in reaching a $13.7 billion agreement to buy ITT Corp.

Dallas-based Patriot will pay cash for 40 percent of Interstate's outstanding shares and exchange its stock tax-free for the remaining 60 percent.

With the completion of all of its purchases, Patriot American will have 455 hotels with some 103,000 rooms that it either owns, leases, manages or franchises.

The centerpiece of its plan is Wyndham Hotel Corp., which it expects to acquire in the next month or so for $1.1 billion.

To bolster the brand, Patriot American said it reached a tentative agreement with Marriott International Inc. allowing it to convert 10 Marriott-brand hotels acquired with Interstate to the Wyndham name. In return, Marriott will assume management of 10 Marriott hotels franchised by Interstate.

With Interstate, Patriot American will own outright another 40 mostly upscale hotels. About half of those can be converted to the Wyndham brand, said Wyndham Chairman and Chief Executive James Carreker, who will head Patriot American's operating company after the Wyndham merger.

Owning its own brand allows Patriot to save the cost of franchise fees it would have to pay to other companies. It also boosts recognition with potential customers.

The company hopes to boost the number of Wyndham hotels to 150 by the end of 1998 from 106 now.

``They're growing a brand here, and it will start to bear fruit in the next 24 months,'' Keung said.

Patriot American is also acquiring the hotel businesses of Carnival Hotels & Resorts and WHG Hotels & Casinos. Interstate operates hotels in the U.S., Canada, the Caribbean and Russia.

Patriot said the Interstate purchase will boost its funds from operations by about 8 percent in the first year.

With Interstate, Patriot is also getting President W. Thomas Parrington, who is well regarded in the industry for his operations expertise, analysts said.

``Six months ago you heard people saying they have no management,'' said analyst Brad Cohen of Sands Brothers & Co., who has a ``strong buy'' rating on Patriot American. ``I think it brings them to the other extreme.''

The agreement is subject to Patriot American shares trading within a range of $27.97 to $34.19. Interstate will have the right to cancel the sale if Patriot American's average share price falls below $26.42 over a 20-day period ending five days before Interstate's annual meeting.

The purchase is expected to close in late February or March.