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Hilton Files for $1.25B IPO Amid Lodging Boom

Stocks in this article: BX H MAR HOT

Updated from 8:26 a.m. with analyst commentary throughout.

NEW YORK ( TheStreet) -- Blackstone (BX)-owned Hilton Worldwide has filed a $1.25 billion initial public offering that could return the international luxury hotel chain, one of the biggest private equity takeovers of all-time, to public stock markets.

Hilton's prospective IPO comes amid a rise in revenue the firm generates from each of its hotel rooms, which has helped to push overall profits higher in recent years. The move comes as publicly traded competitors such as Starwood Hotels & Resorts (HOT), Marriott Worldwide (MAR), Hyatt Hotels (H) and Wyndham Worldwide (WYN) test multi-year share price highs.

Blackstone's decision to offer Hilton shares to the public could put it in a path to monetize a key pre-crisis buyout investment. However, for now, the offering is being used as a means to repay some of Hilton's about $15 billion in outstanding debt.

Blackstone has invested about $7 billion in equity from its various private equity and real estate funds into Hilton. The PE firm bought the hotel chain in a 2007 buyout that valued the firm at $26 billion, including debt.

In its filing, Hilton did not offer details on how many shares it will offer to the public or at what price. The $1.25 billion share sale amount referenced in the prospectus is used to calculate registration fees that could change. Deutsche Bank (DB), BofA Merrill Lynch (BAC), Morgan Stanley (MS) and Goldman Sachs (GS) will be arranging the IPO, according to a prospectus.

Hilton operates its business through a management and franchise segment, an ownership segment and a timeshare segment. Hilton's franchise business is responsible for much of the company's recent earnings and cash flow growth, Ryan Meliker, a senior analyst on MLV & Co.'s REIT research team, said in a telephone interview.

The management and franchise business has grown its total room count 39% since June 30, 2007, representing 98% of Hilton's overall room growth at virtually no capital cost, Hilton said. In total, Hilton licenses its brand to 3,843 hotel franchises globally, which are owned by third parties.

Meliker credits the strength of many Hilton brands for the performance of its management and franchise business. He noted that Starwood, Marriott and Choice Hotels have also moved in a similar direction, in recent years. Hilton's owned properties, however, still contribute significantly to the company's earnings, generating roughly 50% of overall revenue.

Hilton's financial picture became muddled after its debt-laden buyout, which came just ahead of the 2008 financial crisis. The company continues to hold about $15 billion in long-term debt to go with its $2.1 billion in earnings before interest, taxes, depreciation and amortization (EBITDA) in the 52-weeks ended on June 30. Still, amid a sharp tumble in interest rates commanded by high yield bond issuers, the company has been able to dramatically reduce its annual interest expense.

According to Hilton's filing, it has paid $562 million in interest on its debt in the past 52-weeks, down over 40% from 2010 levels when the company's interest expense neared $1 billion. Hilton is currently in the process of refinancing about $13.5 billion in debt, according to Bloomberg.

Meliker, the MLV & Co. analyst, said Blackstone was wise to repurchase and refinance some of Hilton's outstanding debts in 2009 and 2010, in a move that added significantly to the company's equity value. "I think Blackstone will absolutely look at it as a success," Meliker said of the 2007 buyout.

Hilton's falling interest expense has also coincided with a pickup in demand for the firm's hotel rooms. Revenue-per-available-room has risen to $98.69 in the six-months ended on June 30 from $86.16 in 2010, while occupancy has risen from 68.4% to 72.3%.

The company said in its prospectus it has added the most new rooms of any major lodging company since its 2007 buyout. Hilton has increased the number of open rooms in its system by 34%, or 170,000 rooms. Adjusted EBITDA at its franchised business, meanwhile, has grown by about 30% over that time period, Hilton said.

"Our business has grown during times of economic expansion as well as during global economic downturns," Hilton said in its filing.

The near-100 year old hotel chain owns or franchises 4,041 hotels, resorts and has timeshare properties comprising 665,667 rooms in 90 countries and territories. The company owns or leases interests in 157 hotels.

Hilton's brands include Waldorf Astoria Hotels & Resorts and Conrad Hotels & Resorts, DoubleTree by Hilton and Embassy Suites Hotels, in addition to Hilton Garden Inn, Hampton Inn, Homewood Suites by Hilton and Home2 Suites by Hilton. The company's timeshare brand is Hilton Grand Vacations.

-- Written by Antoine Gara in New York

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