Hilton Worldwide Split-up
Fall 18
On February 26, 2016, Hilton Worldwide [HLT] announced that it would separate into three
independently traded companies. The parent company, Hilton Worldwide [HLT] would continue
to manage the hotels and related relationships. The bulk of the real estate business would be spunoff into a real estate investment trust named Park Hotels and Resorts [PK]. The third company,
Hilton Grand Vacations [HGV], would take the timeshare business.
This case is developed solely for the basis of classroom discussion and is not intended to serve as
an endorsement, or to illustrate effective or ineffective management.
COPYRIGHT 2018 STEVEN FERRARO – NO PART OF THIS CASE MAY BE REPRODUCED, STORED IN RETRIEVAL SYSTEMS, USED IN A SPREADSHEET OR
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Introduction
Hilton Worldwide (HLT) raised approximately $2.35 billion in the biggest-ever hotel initial public
offering (IPO) on December 11, 2013. The company and existing shareholders sold a combined
117.6 million shares at $20 per share. The IPO resulted in establishing a market capitalization of
$19.7 billion for HLT. Blackstone LP, a private equity group and asset manager, took Hilton private
in 2007 for $26.7 billion in one of the largest leveraged buyouts occurring just before the market
correction in 2008. Prior to the IPO, Blackstone refinanced $13 billion of the hotel company’s
debt. Notably, Blackstone did not sell any of its shares in the Hilton IPO, which left it in control of
76.2% of the shares outstanding.
According to PricewaterhouseCoopers, the U.S. hotel industry had been recovering at the time
of the IPO, as evidenced by increasing room rates and occupancy levels for almost four straight
years. Blackstone seemed eager to take advantage of the favorable environment. Earlier in the
year, they raised additional cash by taking Brixmor Property Group (shopping centers) and
Extended Stay America (hotels) public. The Brixmor offer raised $825 million in proceeds while
the Extended Stay America IPO raised $565 million. Following the Hilton IPO, Blackstone took
another owned hotel company, La Quinta, public in April of 2014, and raised an additional $2.1
billion. In June 2014, Blackstone controlled HLT sold the Waldorf Astoria hotel for $2 billion (or
32x EBITDA) to Anbang Insurance Group of China, while securing a 100-year contract to continue
to manage the property. The proceeds were used to acquire five new luxury hotel properties at
approximately 13x EBITDA on average.
On May 5, 2015 CEO Christopher Nassetta announced that HLT was exploring various new
strategies to unlock shareholder wealth. Included in these strategies were mergers, acquisitions,
divestitures, share repurchases and strategic partnerships. Hotel owners/managers were feeling
considerable pressure due to a consolidation of online travel agents and the broad acceptance
of new channels of offering accommodations like Airbnb. This pressure was driving a major
reconfiguration of the ownership of hotel assets. For example, after considering at least ten
different strategic alternatives and partners, Starwood (HOT) agreed to be acquired by Marriott
(MAR) in November 2015. Concurrently, Starwood spun off its timeshare/vacation business
which was immediately acquired by ILG LLC, the parent of Interval Leisure. Analysts expect more
consolidation in the hotel space for years to come.
Hilton Worldwide (HLT)
By January 2016 Blackstone, the controlling shareholder, had reduced its ownership to 46% of
common outstanding stock. Motivation for the sale of its position in HLT was seen as two-fold.
First, Blackstone was taking advantage of a reversal in stock market performance to harvest more
of its original investment. The second motive was more important to the company’s strategy
going forward. By reducing its ownership to less than 50%, Blackstone was allowing Hilton stock
to be qualified for inclusion in the S&P 500 index. Hilton Worldwide Holdings (HLT) was still one
the world’s largest hospitality companies, with more than 4,322 hotels, resorts, and timeshare
properties. It managed 715,062 rooms located in 94 countries and territories. HLT operates under
the following brands: Hilton, Conrad, DoubleTree, Embassy Suites, Hilton Garden Inn, Hampton
Inn, and Homewood Suites. The company has 157,000 employees, not including individuals
working at franchise locations. However, both Nassetta and Blackstone felt HLT could do more
to deliver shareholder value. Nassetta’s deep industry experience lead him to believe that there
may be several options for HLT to consider, including creating a real estate investment trust
(REIT) from HLT’s hotel properties. The CEO knew the REIT territory well, having run Host Hotels
& Resorts for several years prior to taking the Hilton job in 2008.
During the May 2015 earnings call, Hilton management, led by CEO Christopher Nassetta,
suggested that it is considering different ways to restructure some of its business segments.
When asked whether the time-share business is core to Hilton, Nassetta said, "We're always
looking at ways to maximize the long-term value of the company. As part of that, we're looking
at all the options on all segments of the business, including time share." Even though HLT had
suggested that it was considering a share repurchase in June 2015, the market had been
anticipating the long-coming announcement of Hilton’s restructuring decision.
Finally, on February 26, 2016, Nassetta announced that the new, simplified Hilton would divest
certain assets to become a market-leading fee-based business. It would achieve this by breaking
the company into three distinct pieces. A real estate business, to be named Park Hotels & Resorts
(PK), would a leading lodging real estate company with a diverse portfolio of iconic and marketleading hotels and resorts with significant underlying real estate value. Its high-quality portfolio
would consist of 69 premium-branded hotels and resorts with nearly 36,000 rooms located in
prime U.S. and international markets with high barriers to entry. Over 85% of Park’s rooms are
luxury and upper upscale and nearly 90% are located in the United States, including 14 of the top
25 markets as defined by Smith Travel Research (STR). Over 70% of its rooms are located in the
central business districts of major cities and resort/conference destinations.
The fast growing, capital efficient timeshare business would be named Hilton Grand Vacations
(HGV). HGV will assume the marketing and selling of vacation ownership intervals (“VOIs”), the
management of resorts in top leisure and urban destinations, and will operate a point-based
vacation club. It will own 46 resorts, representing 7,402 units, are located in iconic leisure and
urban vacation destinations such as the Hawaiian Islands, New York City, Orlando and Las Vegas,
and feature spacious, condominium-style accommodations with superior amenities and highquality service. Through Hilton Grand Vacations Club, HGV’s approximately 255,000 members
have the flexibility to exchange their VOIs for stays at any Hilton Grand Vacations resort or any
property in the Hilton system of industry-leading brands across more than 4,600 hotels, as well
as numerous experiential vacation options, such as cruises and guided tours.
The third piece, the hotel management company, would retain the remaining hotel portfolio and
all the related management and franchise contracts. Nassetta noted that there was a “once-ina-generation” migration of people into the middle class in China, Brazil, India, and the Middle
East, creating more disposable income and a desire to travel. He planned to take advantage of
this by setting a goal to increase the number of rooms Hilton manages worldwide by 240,000 in
the next 3 to 5 years. Hilton’s Board of Directors approved the plan on December 5, 2016. As part
of the restructuring, HLT would execute a 1-for-3 reverse split immediately following the
distribution of the PK and HGV shares.
The idea of creating pure=play companies is attractive to some investors. When asked about this,
Christopher J. Nassetta, responded “Does this allow us to be more focused? Of course it does,
…We are going to be able to create a lot more value for shareholders as three independent
companies than we would have been able to as one combined entity." The move also allows
shareholders to choose which parts of the business they'd like to own. The timeshare and real
estate businesses, for example, tend to be more capital intensive, meaning that they require
larger cash investments to grow and become profitable than Hilton's hotel business does. In the
past, Hilton shareholders often shied away from accommodating those needs, which may have
hindered profits and growth.
Hilton Time Line
The Industry
Beginning in 2014, the hotel industry caught merger fever.1,2,3 The consolidation and
repositioning of portfolios was driven by the desire to pursue an “asset-light” strategy by major
hotel companies, to gain critical mass by mid-size hoteliers seeking to counter the new-found
competitive advantage create by online travel agents, and by private equity groups seeking to
harvest certain investments and engage in new ventures. Moreover, much of the activity was
cross-border as many companies from large global concerns to small niche players sought to
expand their offerings to potential customers, and fine tune their strategies. Ten of billions of
dollars of hotel assets traded hands in 2014, 2015, and in 2016.
As part of this strategic positioning, some companies were considering spinning off real estate
assets to create REITS. In 1964, Hilton was the first major publicly traded hotel company to
1
Hotel industry enters a merger frenzy, https://www.marketwatch.com/story/hotel-industry-enters-a-mergerfrenzy-2015-10-30, retrieved October 28, 2018.
2
HNN’s global hotel industry M&A list, http://hotelnewsnow.com/Articles/71864/HNNs-global-hotel-industryMandA-list, retrieved October 28, 2018.
3
Hotel industry set for more M&A deals after busy 2015, https://www.reuters.com/article/us-europe-tourismhotels-m-a-idUSKCN0WD1OR, retrieved October 28, 2018.
attempt this. At this time this form of restructuring was seen as controversial and radical.
Following this successful divestiture, Holiday Corp. (1989), Marriott Corp (1992), Promus
Companies (1995), Hilton (1995), ITT Corp (1995), and Host Marriott (1995) all executed
successful spin-offs of real estate assets. However, Marriott (1995) and Hilton (1995) both
experienced significant negative announcement effects of -7.0% and -8.5%, respectively, while
the remaining announcement effects from the group averaged 5.0%. One of the primary benefits
of this strategy is to move the profits into the REIT, which is not taxed at the corporate level if
the REIT distributes 90% of its operating profits to its owners every year. This effectively
eliminated the double taxation of profits. Other industries successfully utilized this form of
restructuring as well.
However, the tax environment was changing. By December 2016, the U.S. congress was ready to
vote on a bill that would prevent future spin-offs of real estate held by U.S. companies. Earlier in
the month, Rep. Kevin Brady, chairman of the House Ways and Means Committee, introduced
the bill to block them. "This was an effort . . . to stop the gaming of some of the REIT spinoffs,"
Mr. Brady said Wednesday. He said the first version of the bill "caught some transactions
midtransaction, and so to avoid a problem or to appear to be retroactive we made changes in
language so we are prospective only." By having gone to the IRS for approval previously, Hilton
would exempt from the bill pending in Congress that would ban spin-off transactions. This gave
Hilton valuable flexibility with a spin-off option. Alternatives such as asset sales and carve-outs
are taxable transactions, and could result in considerably less after-tax proceeds due to the 20%
capital gains tax.
Finally, timeshare/vacation businesses were also beginning to be separated from hotel
companies. In 2011, Marriott successfully spun off its timeshare business into a new publicly
traded company called Marriott Vacation Worldwide (VAC). Likewise, Starwood recently spunoff its timeshare business when it was acquired by Marriott. The business was immediately
acquired for $7.50/share by ILG LLC, the parent of Interval Leisure, an operator of timeshare and
vacation businesses.
Valuing REITs
In 1991 the National Association of Real Estate Investment Trusts, Inc. (NAREIT), adopted a
definition for the Funds From Operations (FFO) in an attempt to standardize the analysis of REIT
operating performance and overcome some perceived deficiencies in U.S. GAAP. The current
definition is:
FFO = net income + depreciation and amortization
Where net income is defined as GAAP net income, excluding gains or losses from property sales,
and adjusted for unconsolidated partnerships and joint ventures. According to NAREIT, it is ideal
for REITS to report FFO from continuing operations and discontinued operations separately.
Because this measure is widely accepted, it is used as a substitute for the cash flow measure in a
discounted cash flow method. However, multiples valuation using EBITDA and EBIT, as well as
revenue and book values are also used to supplement this application. NAREIT also reports that
REIT investors have experienced annual returns of approximately 12% for over two decades.
Questions
1. Consider the market’s response to Hilton’s decision to spin-off their real estate and
vacation/timeshare businesses in an effort to maximize shareholder value. Does the
market’s response lead you to conclude that it thinks HLT made the correct strategic
choice?
2. When comparing the pre-divestiture HLT to its peer group (i.e. Hotel Management
companies) using value driver analysis, do you find any evidence that HLT is undervalued?
Please provide evidence for your conclusion.
3. A common way to value hotel companies is by using EBITDA and EBIT multiples. Using
these valuation methods, what is your enterprise value estimate of the new (i.e. post
divestiture) HLT? What is the enterprise value of the new HLT based on revenues and
earnings multiples? What do you believe is a reasonable estimate of value for HLT?
4. An acceptable way to value real estate investment trusts (REITs) is by using a multiple of
EBITDA. Using this valuation method, as well as a funds from operations (FFO) in a
growing perpetuity model where the cost of capital is 12%, what is your enterprise
valuation estimate of PK? Based on multiples of revenue and book values, what is the
value of PK? What do you believe is a reasonable estimate of value for PK?
5. A common way to value timeshare/vacation companies is by using EBITDA and EBIT
multiples. Using these valuation methods, what is your enterprise value estimate of HGV?
What is the enterprise value of the new HGV based on revenues and earnings multiples?
What do you believe is a reasonable estimate of value for HGV?
6. Hilton could have chosen to sell its real estate and vacation/timeshare assets in a private
transaction (i.e. asset sale), or divested them using a carve-out transaction, rather than a
spin-off. Do you believe that a spin-off was the value maximizing form of divestiture for
these assets? Why or why not?