Deleveraging a factor in Hilton IPO’s appeal: Report

SinceThe Blackstone Group LP took Hilton private in 2007 for $26.7 billion with total debt/EBITDA multiple of 11.6x, at the peak of that decade’s buyout boom, Hilton has paid down about 30 percent of its total debt, lowering that debt multiple to less than 7.5x. After the initial public offering, that multiple should be down to 6.5x, according to the report by Chad Mollman, an equity analyst at Morningstar, and David Sekera, a bond strategist at the firm.

Hilton filed in September to raise $1.25 billion through an IPO, with the proceeds expected to be used to further pay down debt.

Hilton plans to raise $14.1 billion of debt through new bonds and loans, Morningstar said. The company’s Hilton Worldwide Finance unit is to issue $10.1 billion of debt, comprising $6.8 billion of senior secured bank debt in the form of a $1 billion revolving credit facility and $5.85 billion of term loans, along with $1.25 billion of senior secured notes and $2 billion of senior notes. In addition, the parent Hilton Worldwide is to issue $4 billion of debt, including $3.5 billion of commercial mortgage-backed securities backed by 23 U.S. owned properties and a separate $525 million property loan secured by its Waldorf Astoria property.

Hilton should benefit from its strategy of shifting toward hotel management and franchising, which Morningstar called an “asset-light strategy” in contrast to owning and managing its own real estate. Hilton both manages its own hotels and franchises the name to others.

For instance, during Blackstone’s watch, in 2010, Hilton launched an initiative in its time-share division to work with third-party developers, so that Hilton could generate sales fees and management fees without having to pay the land acquisition costs and construction costs for the properties, Morningstar said. In addition, more than 99 percent of the company’s pipeline of new hotels is made up of managed and franchised hotels.

Hilton also benefits from sticky long-term management and franchise contracts, which typically run 10 years to 20 years, as well as a network effect from travelers using its loyalty program and brand recognition, which enable it to charge premium room rates, averaging 15 percent more than peers, Morningstar said.

Hilton plans to increase the size of its offering to about $2.25 billion, which will let its preferred shareholders sell about $1 billion of stock, sister news service Reuters reported this week, citing a source familiar with the matter. Blackstone hopes the market will value Hilton at around $30 billion, sources previously told Reuters.