Hilton’s Three Way Split Coming Right Away In 2017

There is just something exciting about a three-way split. It’s just such a radical transformation and in some ways it’s hard to believe that a company like hotelier Hilton Worldwide (HLT) could pull it off. ITT sure, but Hilton? January 3rd is the day though when Hilton will officially spin off a) Hilton Grand Vacations, its timeshare business and b) Park Hotels and Resorts, a REIT owning certain hotel properties. The latter company is especially notable because it is likely to be one of the last of its kind. Earlier this year the IRS mostly pulled the plug on REIT spinoffs, but those that were in process, such as this one, were grandfathered in and allowed to proceed.

Although the tax-free spin is expected to be executed on January 3rd, 2017, the new companies will only begin trading independently on the 4th. The new tickers will be ‘HGV’ and ‘PK’ for Hilton Grand Vacations and Park Hotels respectively. Shareholders will receive 1 share of Park Hotels for every 5 HLT shares owned and 1 share of Hilton Grand Vacations for every 10 shares of HLT owned. Putting that all together means that owning 10 HLT shares would yield 2 PK shares and 1 HGV share. Immediately following the spinoff Hilton will execute a 1:3 reverse split which will reduce its total shares outstanding and further complicate things.

Here is how the leadership at all three companies will shake out:

Following completion of the spin-offs, Hilton will continue to be led by its current president and chief executive officer, Christopher J. Nassetta. As previously announced, Thomas J. Baltimore, Jr. will serve as president, chief executive officer and as a director of Park. Mark Wang, executive vice president of Hilton and president, Hilton Grand Vacations since March 2008, will serve as president, chief executive officer and as a director of HGV.

Hilton’s Board of Directors will not change as a result of the transaction, but the new companies each recently released their expected new slates. Hilton Grand Vacation’s board will be chaired by Leonard Potter while Park Hotels’ CEO and President Thomas Baltimore will add the title of Chairman to his business card.

The spinoff is the next step in Hilton’t transformation into an asset light entity which began with Blackstone’s (BX) buyout back in 2006. The parent will now mainly be responsible for managing properties and the brand (and loyalty program) while the actual properties themselves will be owned and financed by third parties, including Park Hotels. This isn’t a new arrangement and as we previously noted, there are even some spinoff comps already out there. For example, Marriott International (MAR) spun off its property holdings, Host Hotels and Resorts (HST), into a REIT a long time ago. Although Park Hotels will begin its life a concentrated portfolio of only Hilton properties, over time it is expected to diversify its holdings. The company should be helped by the fact that many of its properties are ‘unique’ and located in high value locations such as NY and Hawaii. Part of the rationale of the spin is that Park Hotels should receive the ‘REIT premium’, although it’s unclear the lodging segment gets such a huge premium due to its volatility.

There are also a number of comps for the timeshare business, Hilton Grand Vacations, including some that we have covered. Marriott spun off its timeshare business, Marriott Vacations Worldwide (VAC), back in 2011. There is a more recent comp though. Earlier this year, Starwood spun off its timeshare business, Vistana Signature Experiences, and merged it into ILG (ILG), the former Interval Leisure Group.

The blog Clark Street Value took a deeper look at Hilton’s upcoming spinoff and came up with a value of $24.33 for the combined entity, about a ~10% discount to the current trading price. The stock has actually come back nicely since its disappointing Q3 and full year forecast was released. While the entire piece is worth reading, he thinks the timeshare business is the most likely to be mispriced by investors after the spin due to its smaller size and lack of a dividend backstop. There is at least one big investor that disagrees with his valuation though. In late October, China’s HNA Group purchased a 25% stake in the parent company from Blackstone at a price of $26.25 per share. This means HNA will also own a 25% stake in both spincos as well. The agreement allows for HNA to have 2 board members at Hilton, includes some restrictions on voting and also restricts their ownership stake from going above 25%.

The sale represents a nice win for Blackstone, but the mega buyout firm still owns over 20% of Hilton’s shares and will have representation on all three boards. On one hand, Blackstone is considered to be a savvy seller so perhaps they feel we have approached a top? On the other hand, perhaps the sale just represented a good, but rare opportunity to take a sizable stake off the table at a nice profit and please their investors? A When-Issued market is already in place – are you buying?

Disclosure: Author holds no position in any stock mentioned.

3 thoughts on “Hilton’s Three Way Split Coming Right Away In 2017

  1. This Here Ninja

    When I ran the SOTP earlier this year, I arrived at a low $30s value for HLT. My SOTP was run off of LTM values whereas Clark Street ran their analysis on projections. Actually I was a bit surprised by Clark Streets conclusions. However, since I bought in the low $20s the margin of safety made this a trade I didn’t need to consternate over.

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