Last updated: December 11, 2013 10:40 pm

Hilton IPO prices near top of the range to raise $2.35bn

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Six years after one of the largest leveraged buyouts ever, Blackstone is set to return Hilton Worldwide to the US market after raising $2.35bn in an initial public offering of the world’s biggest hotel chain by number of rooms.

Hilton sold 117.6m shares at $20 each on Wednesday, at the upper end of the $18-$21 price range it had set. It sold 5m more shares than it initially said it would, demonstrating resurgent investor demand for hotel stocks, which have enjoyed a rebound in room rates, occupancy levels and business travel.

The IPO will rank as the second-largest US offering this year assuming its underwriters, including Deutsche Bank, Goldman Sachs, Bank of America Merrill Lynch and Morgan Stanley, exercise an additional allocation of shares. It will be the largest offering by a hotel operator.

For Hilton and its owners, the deal caps a tumultuous journey since the heady days of 2007 when it was bought by Blackstone, the private equity group, for $26bn including debt. The company intends to use about half the IPO proceeds to reduce its debt burden, which is falling but remains substantial compared to rivals.

Even so, Blackstone believes it can turn a profit of around 2.5 times the equity it invested in the buyout, according to people familiar with the transaction.

The deal is a triumph for Jon Gray, the head of Blackstone’s real estate group, who had faith in the investment even as property values fell and hotel occupancies tumbled in the darkest days of the financial crisis.

However, in the hours before Hilton’s underwriters set the IPO price, some investors questioned whether the hotel chain could sustain a valuation that places the company ahead of its peer group.

At $20 a share, Hilton would have an enterprise value of around $32bn. An analysis of the ratio of 2014 enterprise value to earnings before interest, depreciation, tax and amortisation shows the company would be valued at a double-digit premium to an average multiple for peers including Starwood, Marriott and Hyatt, according to Morningstar.

“We view Hilton as attractive from the standpoint of its shift towards hotel management and franchising, its solid new hotel pipeline, and a deleveraging balance sheet, but a lack of a compelling valuation prevents us from recommending the stock to investors with a long-term investment horizon,” Morningstar analysts said.

Blackstone landmark

The Hilton Park Lane, London

Hotelier Conrad Hilton bought Manhattan’s Waldorf Astoria in 1949, calling it the “greatest of them all”. Once the world’s largest and tallest hotel, the Art Deco building on Park Avenue epitomised New York’s jazz age lustre.

But decades later, the landmark hotel famed for hosting the likes of mobster Bugsy Siegel and actress Marilyn Monroe became tired and lost its competitive advantage – a fate which mirrored that of its parent company.

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Another concern among investors is that Blackstone will look to unload its majority stake, which will represent about 76 per cent of shares outstanding after the IPO, over the next three to five years, according to analysts at Green Street Advisors.

But that is also seen as a possible boon in the short term to its shares since the private equity company is not selling down its stake in the IPO and has an incentive to see the stock trade higher.

The deal owes much to Hilton’s high-margin franchising strategy, its management team – under chief executive Chris Nassetta – and its ability to harness the sector’s recovery and drive room count, particularly overseas.

Blackstone also benefited from the US Federal Reserve’s easy money policies which made possible both an aggressive restructuring of the chain’s more than $20bn in debt and spurred investment into equity markets, allowing companies such as Blackstone to list their portfolio companies.

“The biggest accelerator and improvement in Blackstone’s return profile on Hilton was when they bought back the debt and then restructured it,” said one investor who has followed the transaction closely. “The discipline to stay with their growth plan also contributed significantly to where Blackstone is today with the asset.”

The shares will begin trading on the New York Stock Exchange on Thursday under the symbol “HLT.”

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