There are a number of factors that play into HNA Group’s decision to purchase a 25% interest in Hilton Worldwide Holdings for $6.5 billion from Blackstone.
REPORT FROM THE U.S.—Given all of HNA Group’s recent activity in the hospitality sector, its purchase of a 25% equity interest in Hilton Worldwide Holdings makes perfect sense, analysts said.
Hong Kong-based HNA Group will pay $6.5 billion to The Blackstone Group for the 25% interest, decreasing Blackstone’s share to 21%. The deal is expected to close in early 2017. Representatives for Blackstone and HNA Group did not respond to requests for comment. Hilton declined to comment beyond what is stated in its news release.
HNA Group is a large travel-related company that, among other operations, owns airlines and airports in China, said David Loeb, senior research analyst and managing director for Robert W. Baird & Company. It’s a logical move to diversify its money into dollars with strategic investments in global hotel brands, he said, and to forge partnerships with companies that allow each to leverage its strengths.
“I would not be surprised if there’s a loyalty program that ties up with their airlines and Hilton Honors,” Loeb said. “There may be other joint developments or other things they can do to work together.”
This development could push other major brand companies to explore their own alliance opportunities to penetrate into markets where they don’t have as strong a presence, he said.
A careful deal
The situation gets complicated with HNA Group in the process of buying Carlson Hospitality Group, Loeb said. HNA will have complete control of Radisson while also seeking 25% interest in competing hotel brand company Hilton.
Perhaps as a result, there are limitations to what HNA Group could do with its 25% interest in Hilton.
“It’s not a control stake, just a large stake with board seats and representations,” Loeb said.
The Chinese company can never vote more than 15% of its shares, with the remainder of its votes going to the majority of the other shareholders. It’s a twist on super-voting powers for other shareholders, he said.
“It’s meant to keep HNA from slowly taking control,” he said. “If they want to buy the whole company, they would have to come back and make an offer.”
Chinese investors are looking to stop, or at least slow, the devaluation of their country’s currency, said Guy Maisnik, partner and vice chair of the hospitality group at Jeffer Mangels Butler & Mitchell.
China has seen a trillion dollars in outflow of capital since the beginning of last year, he said. Real estate in the U.S., particularly hotels, is viewed as a way of stopping that flow.
Getting involved in the U.S. hotel industry ties harder assets to the currency, Maisnik said, which is why they pay significant premiums on real estate assets and companies involved with real estate.
Anyone expecting their currency to drop in value, he said, would start looking at places to buy. Some might buy gold, but that doesn’t pay dividends, he said. Others would look to places with a more stable market.
Europe and the United Kingdom aren’t the most stable markets, Maisnik said, so the smart choice is the U.S.
“They already have a strong investment with the U.S. by holding so much of the (national) debt,” he said. “It’s a natural place for them to come.”
HNA is the largest shareholder in three public hospitality companies, said Whitney Stevenson, senior analyst at JMP Securities. This isn’t just capital outflow from China looking for somewhere to park money, she said.
“They are well-studied in the region,” she said. “This is more strategic than trying to get capital out of the country.”
This is the natural evolution of the trend of foreign capital coming in, she said, similar to the influx from Japanese investors.
“I think once people get comfortable with real estate ownership and have ownership at scale, it’s a natural transition to get into the operating businesses as well,” Stevenson said.
This movement will happen slowly over time, she said, as there won’t be a massive wave of capital in the immediate future.
“It’s a trend emerging over time and will continue to evolve,” Stevenson said.
Benefits for Blackstone
The sale of shares to HNA Group allows Blackstone to slowly pare back its position, said Wes Golladay, VP and equity research analyst at RBC Capital Markets. The company will retain 21% ownership, he said, while removing some of its overhang. Over time, Blackstone will continue to shrink its ownership of Hilton, but there isn’t immediate pressure to do so.
“They do have other options,” Golladay said. “I do think at least they’ll find some expected value to them paring back their position a little more.”
Blackstone slowly has been exiting since Hilton’s IPO in 2013, Loeb said, and now the company is seeing a good return on its original investment. The benchmark for comparison isn’t the original purchase but Hilton’s value when it went through its major debt restructuring, he said.
“It’s been a very successful investment by Blackstone,” he said.