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Hilton Prices IPO at $20 in Record U.S. Hotel Offering

NEW YORK (TheStreet) - Blackstone BX-owned (BX) Hilton Worldwide has priced its initial public offering at $20 a share, in what is poised to be the biggest-ever U.S. hotel IPO.

Earlier in December, Hilton set its initial IPO price range at between $18 and $21 a share. While Hilton will offer its stock just below the high end of that range the McLean, Va.-based company is increasing the offering size.

Hilton will seek to sell 117.6 million shares at a price of $20 a share, raising $2.35 billion from the offering. The company will be offering 64.1 million shares, while a selling stockholder will offer 53.5 million shares, Hilton said in a filing with the Securities and Exchange Commission.

The company will list on the New York Stock Exchange  (NYX) under the ticker symbol "HLT."

Ryan Meliker, an equity analyst at boutique investment bank MLV & Co. said in a Monday telephone interview he expected strong demand for Hilton's IPO given the firm's exposure to recovering consumer spending and international growth. He also noted that depending on the IPO pricing, Hilton's IPO could be a boon for stock valuations across the lodging sector.

The company plans to use IPO proceeds to pay down some of its $7.5 billion in outstanding term loan borrowings. Blackstone Group will remain Hilton's majority owners after the share offering with an over 75% economic interest in the company, according to S-1 documents.

The share offering will also be a major story to follow in the rebounding hotel industry and 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.

Hilton'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 for over $26 billion in 2007, 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 company.

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.

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.

By contrast, competitors such as Marriott International (MAR), Hyatt (H) and Starwood (HOT) aren't as exposed to franchised operations and have grown their overall room count at slower rates in recent years.

Blackstone's stake in Hilton will be valued at slightly over $15 billion, assuming Hilton's offering price. That valuation would mark a fairly successful investment even if it created doubters through the financial crisis. Blackstone has invested about $6.4 billion in Hilton through its buyout investment.

Other investors will also be prominent investors in Hilton as it lists its shares on the NYSE.

According to IPO documents, Singaporean sovereign wealth fund GIC Private Ltd. is expected to own roughly 49.5 million shares in the company, or about 5% of the McLean, Va.-hotelier's outstanding stock.

That stake may underscore the Singaporean fund's ties to Blackstone and its white-knuckle Hilton investment. GIC is also is an owner of franchised Hilton hotels, after acquiring three Waldorf-Astoria branded hotels in March and appears to be an active investor in franchised hotel properties across the U.S.

GIC's stake and that of Hilton's selling shareholder in its IPO relate to the company's April 2010 debt restructuring, in which the company reduced its debt load by $4 billion. Hilton recognized a $789 million gain on its debt restructuring efforts by the end of 2010.

Those, like GIC, who invested in Hilton as it worked to restructure its debt were given the option to either cash out of their holdings at the company's initial public offering or retain a common stock interest in the hotel chain.

While GIC will hold a 5% stake in Hilton, there will be some participants in the debt restructuring that opt for a cash payment. Contrary to some media reports, that selling shareholder, referenced as "Hilton Global Holdings LLC" won't be The Blackstone Group. The identity of all selling shareholders could not be determined.

"The members of Hilton Global Holdings LLC that have elected to receive a cash payment are former lenders to us (or their transferees) who received their interests in Hilton Global Holdings LLC as part of our 2010 debt restructuring," Hilton states in its IPO filing.

"No private equity or real estate opportunity fund or co-investment vehicle sponsored or managed by The Blackstone Group L.P. is selling shares in this offering or receiving cash in lieu of selling shares," Hilton said.

According to SEC filings, some selling shareholders include a unit of Goldman Sachs (GS) and a unit of Capital Trust, an asset manager Blackstone acquired in 2012. Goldman is one of over 20 underwriters on Hilton's IPO, as is Blackstone Capital Markets.

-- Written by Antoine Gara in New York.

Follow @antoinegara

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