Hilton CEO sheds light on HNA Group deal, spinoffs
 
Hilton CEO sheds light on HNA Group deal, spinoffs
27 OCTOBER 2016 9:15 AM

Hilton Worldwide Holdings CEO Chris Nassetta fielded questions from analysts about the company’s new shareholder, Hong Kong-based HNA Group, and the brand’s two new spinoff operations.

MCLEAN, Virginia—The recent news of HNA Group’s purchase of 25% in Hilton Worldwide Holdings and two forthcoming spinoffs dominated the discussion during the company’s third-quarter earnings call with analysts Wednesday.

Hilton President and CEO Chris Nassetta provided some details about the company’s recent developments, but as the HNA Group deal is so new, and the two spinoffs are almost complete, he was limited in what he could discuss.

The third quarter proved tougher than expected, but Hilton executives said the company performed well and met expectations. Rates drove systemwide comparable revenue per available room growth of 1.3% year over year, Nassetta said. Strong group business helped support RevPAR growth, but corporate transient performance proved softer than predicted. Adjusted earnings before interest, taxes, depreciation and amortization rose 1% year over year to $765 million.

The company’s pipeline came to about 300,000 rooms at 1,898 hotels as of 30 September, according to the earnings report. Those projects are in 91 countries and territories, 31 of which have not previously opened a Hilton hotel. Approximately 149,000 rooms are under construction.

Based on projections for the fourth quarter, the company adjusted its full-year systemwide RevPAR growth projections down to 1.5% to 2% growth. Last quarter, Hilton projected full-year RevPAR growth to come in between 2% and 4%.

As of press time, Hilton’s stocks were up 4.12% year to date. The Baird/STR Stock Index was down 1.25% for the same time period.

Details on HNA Group deal
The company announced 24 October the sale by The Blackstone Group of 25% equity interest in Hilton for $6.5 billion to HNA Group. The strategic sale, Nassetta said, came at a premium price with a thoughtful shareholder agreement that includes a two-year lock up and limited voting rights. It’s a win for all parties involved, he added.

He said the deal opens up opportunities to connect Hilton’s system with HNA’s customers through HNA’s online and offline travel agencies, as well as its airline network and loyalty program.

“We also believe that HNA’s financial business and extensive relationships could afford opportunities to support our development growth both in and outside of China,” he said.

It’s too early to know the impact HNA’s purchase will have on EBITDA, Nassetta said. Hilton spent months working with HNA’s leadership, he said, and there are compelling strategic reasons this move is beneficial to Hilton.

There isn’t much overlap between Hilton’s core customers and HNA’s, he said, so this is a “tremendous” opportunity to connect those customer bases and feed Hilton’s system throughout the world, especially in China.

“We are having those discussions—sort of putting, as I would say, the meat on the bones of exactly how that’s going to work. But you can imagine taking our hundreds of millions of folks with their hundreds of millions of folks, where there’s not a lot of overlap, and connecting the dots can be incredibly powerful,” he said.

During the earnings call, an analyst asked about potential conflicts of interest—such as HNA holding ownership stakes in other hotel brand companies. Nassetta responded that the shareholder agreement shows that everything is 100% transparent. The provisions of the agreement state that HNA can have one HNA-affiliated board member and an independent board member, he said, but both must go through a vetting process of the nominating committee that also decides how the board members interact and participate on issues that might conflict with HNA’s investments.

“If you look at it very carefully, we were very thoughtful about making sure that where there might be potential for conflict, we limited their voting rights, we limited what they can participate in board discussions, and on the board we also limited their voting rights, ultimately, on certain transactions and events to make sure that we dealt with those conflicts,” he said.

“So we’ve spent months, literally, of time on these issues. We had a special committee of our board that went through an incredibly rigorous process with outside advisors, both on the banking, legal side. Management was very actively engaged with them in giving it our advice. And the reason it took a couple months is because we wanted to make sure we were protecting the base of other shareholders in the company against any potential conflict.”

Spinoffs on track
Hilton spinoffs—Hilton Grand Vacations and real estate investment trust Park Hotels & Resorts—are on track for completion by the end of 2016, Nassetta said. Both will help the company achieve meaningful tax and capital market efficiencies, he said. More information will be available once the spinoffs are complete.

The HNA Group purchase complicates the REIT spinoff, however. Nassetta fielded a question about the incremental sale of shares by Blackstone to HNA prior to finalizing the REIT and how the math works with ownership restrictions under REIT tax laws.

The IRS rules regarding this matter are complex and difficult to explain, Nassetta said.

“If they own ‘X,’ they're selling ‘Y,’ because it has a lot to do with how Blackstone owns the shares in the company and the various funds that they have—very complex attribution rules,” he said. Even between large shareholders like HNA and Blackstone, “though they are unrelated in the attribution rules, they become related to a certain degree,” he said.

Hilton is working with tax advisers to make sure it complies with REIT qualification rules, he said.

“It became apparent to us, in doing the work, that in order to qualify, we needed to have Blackstone sell down 5.5%, and that’s why we’ve disclosed it,” he said. “Obviously, we can do the spins without that sell down because this problem only arises as a consequence of the HNA deal. So really they have to have done this by the time the HNA deal closes.”

Hilton has a contractual agreement with Blackstone which states Blackstone will sell enough so that Hilton can make sure Park Hotels & Resorts qualifies as a REIT, he said.

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