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China's HNA to buy US$6.5b Hilton stake from Blackstone

Tuesday, October 25, 2016 - 06:54

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China's HNA Group, on an acquisition spree in travel-related businesses, agreed to buy about 25 per cent of Hilton Worldwide Holdings Inc from Blackstone Group LP for about US$6.5 billion, easing the overhang that has hampered the hotel company's stock since its 2013 initial public offering.

[SEATTLE] China's HNA Group, on an acquisition spree in travel-related businesses, agreed to buy about 25 per cent of Hilton Worldwide Holdings Inc from Blackstone Group LP for about US$6.5 billion, easing the overhang that has hampered the hotel company's stock since its 2013 initial public offering.

HNA, controlled by Chen Feng, will pay US$26.25 a share in cash, or 15 per cent more than Hilton's closing price on Friday.

The transaction cuts Blackstone's interest in Hilton, the world's second-largest hotel operator, to about 21 per cent, according to a statement Monday. Hilton climbed 0.9 per cent to US$23.11 at 11.35 am New York time after rising as much as 3.7 per cent earlier.

"This investment is consistent with our strategy to enhance our global tourism business, and we look forward to working together on new initiatives that leverage our respective strengths, expertise and tourism platforms," Adam Tan, vice chairman and chief executive officer at HNA Group, said in the statement.

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Chinese firms have been stepping up investments in hotel and travel businesses around the world as outbound tourism surges. HNA in April agreed to buy Minneapolis-based Carlson Hotels Inc and its majority stake in Rezidor Hotel Group AB, owner of the Radisson brand.

HNA last year purchased a minority stake in Red Lion Hotels Corp. HNA's ambition is to sell the full range of travel services, including booking trips, hotel rooms and airline tickets.

The Hilton deal, expected to be completed in the first quarter, helps both HNA and Hilton accelerate their businesses in China, one of the fastest-growing hotel markets, as well as capture a greater share of international tourism. HNA, based in Haikou City, owns Hainan Airlines and the second-largest online travel business in China.

The agreement allows HNA to appoint two directors to McLean, Virginia-based Hilton's board. HNA also will own a pro-rata stake in Park Hotels & Resorts, the planned spinoff of Hilton's real estate, and Hilton Grand Vacations, the company's timeshare business, according to the statement. Both are set to be spun off around the end of the year.

HNA can't sell any of its stake in Hilton for two years and can't increase its holding to more than 25 per cent without Hilton's consent, according to the statement. HNA also agreed to voting rights that would keep part of its stake aligned with other shareholders.

Blackstone is tripling its money in its sale of shares to HNA. The New York-based firm's cost basis in Hilton is about US$8.60 a share.

Blackstone bought Hilton in October 2007 for US$26 billion in what was the last major real estate buyout before the financial crisis. The enormous debt burden from the buyout, a joint deal between Blackstone's real estate and private equity funds, needed to be restructured when credit markets seized up and forced Blackstone to put in an additional US$800 million of cash to salvage the deal.

After expanding its room count by a third under CEO Christopher Nassetta, Hilton went public in Dec 2013 in a record IPO for a hotel company, raising more than US$2.35 billion. Hilton has increased its room count by more than half under Blackstone.

The overhang of Blackstone's majority ownership, however, capped gains in Hilton stock, which has risen 16 per cent, including reinvested dividends, since the IPO. By comparison, Marriott International Inc shares have returned more than 51 per cent. Marriott last month acquired Starwood Hotels & Resorts Worldwide Inc to create the world's biggest hotel operator.

The deal "demonstrates the undervalued nature of Hilton's shares, solidifies our belief that foreign capital remains active in its pursuit of high-quality hotel brand and real estate investments, and reduces the perceived Blackstone overhang," David Loeb, a senior lodging analyst at Robert W Baird & Co, said in a research note Monday.

JPMorgan Chase & Co advised HNA and Evercore advised Hilton's board, according to the statement.

HNA Acquisitions HNA Group, started in 1993, has transformed itself from a traditional aviation company to a conglomerate whose businesses span finance, leasing, hotels and real estate.

The company said it has US$90 billion of assets, US$30 billion in annual revenue and an international workforce of nearly 200,000 employees across North America, Europe and Asia.

Mr Chen, who started Hainan Airlines more than two decades ago, has said his goal is to make HNA Group one of the world's top 100 companies by 2020 and among the top 50 by 2030.

The company this month agreed to buy the aircraft-leasing business of CIT Group Inc for US$10 billion, a deal that came months after HNA completed the purchase of a stake in Azul Linhas Aereas Brasileiras SA, Brazil's third-largest airline.

It also agreed to buy part of Virgin Australia Holdings Ltd and acquire Swiss airline caterer Gategroup Holding AG, after taking over airport luggage handler Swissport International Ltd in February.

Mr Chen and his brother, Chen Guoping, are the co-founders of HNA, although neither is believed to have a controlling stake. The group's largest shareholder is said to be a charitable fund called the Hainan Province Cihang Foundation, which is headed by Zeng Haorong, the former mayor of Haikou.

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