Singapore Bets on Blackstone's Hilton IPO After 2010 Debt Restructuring

Updated from 8:07 a.m. ET to reflect MLV & Co. analyst comments.

NEW YORK (TheStreet) -- Singapore's sovereign wealth fund GIC Private Ltd pumped equity into Blackstone Group (BX)-owned Hilton Worldwide when the company needed to restructure its debt in the credit crunch that ensued after the hotel chain's 2007 leveraged buyout. Now, GIC is prepared to hold onto a large chunk of Hilton Worldwide shares as the company moves towards an initial public offering.

In contrast to GIC, other providers of emergency relief to Hilton during its debt restructuring will be cashing out of their holdings in the company's IPO. GIC is poised to be a 5% stakeholder in Hilton when the company lists its shares, in what could be a $2.4 billion IPO that would be the biggest in the U.S. hotel industry.

According to IPO documents, GIC is expected to own roughly 49.5 million shares in the company shares, 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.

"It is not atypical for them," Ryan Meliker, a senior analyst at boutique investment bank MLV & Co. said of GIC's Hilton investment. The sovereign wealth fund is a major holder of U.S. real estate and lodging properties franchised by the likes of Marriott, Hyatt and Starwood.

GIC's stake is disclosed as "HHotels Mezz Debt Private Limited" in S-1 filings with the Securities and Exchange Commission and is related to Hilton's debt refinancing efforts.

In April 2010, Hilton Worldwide restructured $4 billion in combined senior mortgage loans and secured mezzanine loans.

The firm restructured its debt through the repurchase of $1.8 billion in secured mezzanine debt for a cash payment of $819 million, a 54% discount to par value, according to SEC filings. The cash payment from Hilton's parent, The Blackstone Group, the documents said. Hilton also extinguished roughly $2 billion in junior mezzanine debt by converting it into preferred equity.

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.

Hilton's IPO prospectus states that the company expects to sell about 64.1 million shares to public stock investors, while a selling stockholder will offer an additional 48.7 million shares. Contrary to some media reports, that selling shareholder, referenced to 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 goes on to say.

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. 

Blackstone Group and Hilton declined to comment. GIC didn't immediately respond to emails seeking comment.

Meliker, the MLV & Co. analyst said in a Monday telephone interview that the debt restructuring will be an important piece to Blackstone's eventual investment return on Hilton.

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 currently estimates it will offer over 112 million of its shares at a range of $18 to $21 a share. That puts the IPO at roughly $2.4 billion assuming the high-point of Hilton's price range, the largest-ever listing in the U.S. hotel industry.

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 a 76.2% economic interest in the company, according to S-1 documents.

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

Blackstone's stake in Hilton will be valued at roughly $15.75 billion, assuming the high-end of the company's IPO price range. 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.

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, 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.

-- Written by Antoine Gara in New York

Follow @antoineGara

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