Should You Check In to Hilton's IPO?
Wednesday, the company priced the IPO at $20 per share, and due to strong demand, raised the number of shares to be sold to 117.6 million from the originally anticipated 112.8 million. That means gross proceeds just north of $2.35 billion, the highest in history for a hotel operator.
Hilton's coming to market now because its majority owner, financial services powerhouse The Blackstone Group (BX), wants to cash out on its investment. The company took the hotel operator private with several partners in 2007.
Since then, Blackstone has watched other big names in the hospitality sector launch well-received IPOs. In late 2009, for instance, Hyatt Hotels (H) debuted on the NYSE, raising gross proceeds of $950 million -- enough to make it one of the highest-grossing issues of that year. That was also good enough to make its shareholders wealthier; from a listing price of $25 per share, the stock closed at $28 on its first day of trading, and just over four years later, it has nearly doubled to more than $46.
More recently, Blackstone had skin in the game in the IPO of long-term hotel operator Extended Stay America (STAY) as a co-owner along with peer financials Centerbridge Partners and Paulson. The shares of ESA rose nearly 20 percent on the company's market debut last month and have since crept higher.
Those kinds of numbers were surely irresistible to Blackstone, which has wisely decided not to sell any of its own Hilton shares in the IPO. Rather, the wily financier says it will dole them out gradually in the months and years ahead. It needs the time -- the company owns more than 750 million shares (roughly 76 percent of the total). But what's the rush? With that kind of holding, even a small movement upward in the stock price will nicely fatten Blackstone's return on its investment.
Famous names have done well in stock market debuts recently. Everyone's familiar with Twitter (TWTR), which helped the social media company rake in $2.1 billion from its IPO last month. It's greatly unprofitable so far, and will probably remain so for a while, but that hasn't prevented its stock from more than doubling its issue price since going public.
%VIRTUAL-article-sponsoredlinks%Hilton has the added advantage of being safely in the black. It's turned a net profit in its last three fiscal years, and in the first nine months of 2013, its attributable net of $389 million was 34 percent ahead of the same period last year. Occupancy has also grown lately, rising to 73.5 percent in the first nine months of this year, compared to 71.1 percent for 2012, and 69.7 percent in 2011.
Additionally, Hilton boasts the largest portfolio in the business. It operates under 10 different brand names across several segments of the market, with 4,080 properties housing a total of nearly 672,000 rooms. Cleverly, the company franchises or manages the bulk of its hotels; these activities carry higher margins and are less cost-intensive than owning them outright.
As with a great many companies that have been taken private, Hilton is now weighed down with a heavy load of debt. At the end of September, total long-term borrowings stood at a bloated $14.3 billion, a figure that was more than double revenues for the first nine months of the year. The company is going to use the bulk of the IPO proceeds to pay down some of this, but that'll only slightly reduce the big pile. Yes, money is cheap to borrow these days, but $14 billion-plus is a massive number and the firm will struggle to cut it down to a less intimidating size.
Yet Hilton is owned and being shepherded to the market by an ace financial operator that knows how to squeeze value out of an asset, and use it to the benefit of shareholders. And that portfolio is big and expansive, plus the franchise/management focus helps the bottom line stay in the black. Last but not least, that famous name will attract attention on its own. Never ignore the power of a known brand, particularly if it's backed by some good fundamentals and a smart, determined seller.
Considering all of the above, Hilton's shares have nice potential. At the close of trading Thursday, the stock had risen to $21.50, and was up nearly 3 percent more on Friday. Don't be surprised if it continues to move steadily upward in the wake of the IPO.
Motley Fool contributor Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends Hyatt Hotels. Try any of our Foolish newsletter services free for 30 days.