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Hilton Seeks $2.4B in IPO After Franchising 99% of Post-LBO Growth

NEW YORK (TheStreet) -- Blackstone Group (BX)-owned Hilton Worldwide will seek to raise up to $2.4 billion in an initial public offering, after the company was able to use fast growth in its franchised hotels to overcome a $26 billion 2007 private equity buyout that piled billions in debt on the company's books just as the global economy fell into a sharp contraction.

Hilton Worldwide's IPO, which could come as early as this week, will be a major story to follow in the rebounding hotel industry. The share offering could also give investors a glimpse into a significant, but unheralded turnaround orchestrated by Hilton and its owners after the company's buyout, which many in the media have used as an example of the peak of a pre-crisis private equity bubble.

According to an amended S-1 filing with the Securities and Exchange Commission, Hilton Worldwide currently estimates it will offer its shares at a range of $18 to $21 a share. Hilton Worldwide will offer over 64 million shares in the IPO, with one selling stockholder offering an additional 48.7 million shares, putting overall IPO proceeds at roughly $2.4 billion assuming the high-point of Hilton's price range.

The company plans to use IPO proceeds to pay down some of its $7.5 billion in outstanding term loan borrowings, the leftover debt from Blackstone's leveraged buyout. Blackstone Group will remain Hilton's majority owners after the share offering with a 76.2% economic interest in the company, according to S-1 documents.

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Hilton Worldwide will list on the New York Stock Exchange NYX under the ticker symbol "HLT."

The company's reliance on franchised hotels for roughly 99% of growth in new and in-construction rooms could prove to be appealing for prospective investors in the highly leveraged hotel chain.

Since taking Hilton private, Blackstone has focused on achieving growth at the hotel chain without putting up much of its own cash to buy and develop real estate in the U.S. and internationally. As a result, 99% of new rooms opened or in construction since 2007 come from franchisees, allowing Hilton to realize industry-leading growth at little cost to the debt-laden company.

According to Hilton's S-1 documents, the company has grown its total rooms by 36% since June 30, 2007 -- the fastest growth rate of any major lodging company. Rooms in the company's development pipeline have grown 60% and rooms under construction have grown 133%, virtually all of which come from franchisees, Hilton said in its IPO documents.

The company's reliance on franchisees has also allowed the company to expand into fast-growing emerging markets without taking on the type of credit and real estate price exposure that would come from developing wholly owned hotels.

In its franchise business, Hilton receives royalty revenue from developers who seek to profit from the company's brand. Franchisees, not Hilton, purchase and develop the real estate.

In China, Hilton has increased its total hotels from just six as of 2007 to 171 hotels currently open or in development. China, as it turns out, has led the world in revenue per available room (RevPAR), a key metric in the hotel industry.

"In the Americas, RevPAR has increased at a CAGR of 6.9% over the past three years and demand has returned to pre-economic crisis levels. The Asia Pacific region also has experienced high RevPAR growth during the last three years, primarily fueled by China and to a lesser degree Southeast Asia. Weaker economic conditions in Europe dampened RevPAR growth, but recent trends show improvement," Hilton states in its S-1.

Still, Hilton's growth push in the U.S. and internationally through franchise businesses doesn't come completely without risk. Were franchisees to dilute Hilton's brand, it could undermine the company's ability to maintain existing relationships and grow new ones. Such a scenario would impact Hilton's franchise earnings, now the lion's share of the company's overall EBITDA.

A source familiar with Hilton's buyout said that a 2010 deal to buy back $1.8 billion in the company's outstanding debt and convert $2.1 billion in junior mezzanine debt to preferred equity, helped to put the company in a position to re-engineer its operation towards a franchised business. That source also said Blackstone's intended to use franchised hotels for growth from the outset of its 2007 buyout.

GIC Private Limited, a Singaporean sovereign wealth fund, will own 5% of Hilton's outstanding shares through a vehicle called "HHotels Mezz Debt Private Limited."

Other hoteliers such as Starwood Hotels (HOT - Get Report), Marriott Worldwide (MAR - Get Report), and Hyatt (H) have relied upon franchise businesses for post-crisis growth, however, Hilton's appears to be ahead of its competitors.

Hilton's franchise business now contributes over 50% of the company's overall earnings before interest, taxes, depreciation and amortization according to its S-1, and adjusted franchise EBITDA has grown by 25% from 2007 through 2012. Franchised hotels are Hilton's fastest source of earnings and hotel growth.

--Written by Antoine Gara in New York

Follow @antoineGara

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