China's HNA Group has stepped up its buying prowess and is showing that interest in U.S. hospitality companies is strong and displaying no signs of retrenchment.
HNA, a Chinese conglomerate whose interests include tourism and aviation, has acquired a 25-percent stake in Hilton Worldwide, one of a recent spate of hospitality-focused moves, which also includes the acquisition of Carlson Hospitality Group and minority stakes in both Red Lion Hotels Corp. and NH Hotels.
The deal drops Blackstone Group's interest in Hilton to around 21 percent from 46 percent and establishes a long-term strategic investment in Hilton and Hilton's planned spin-offs of REIT Park Hotels & Resorts and Hilton Grand Vacations.
The transaction, which is expected to close in the first quarter of 2017, is valued at approximately $6.5 billion, or $26.25 per share in cash. Following Hilton's previously announced spin-offs of Park and HGV, which should happen around the end of the year, HNA will own approximately 25 percent of all three companies.
“We are pleased to welcome HNA Group as a long-term investor and strategic partner," Chris Nassetta, president and CEO of Hilton, said in a statement. "HNA Group has a broad portfolio of successful travel and hospitality businesses and a proven track record of creating value in this industry. We believe this mutually beneficial relationship will open new opportunities for our brands and guests around the world, particularly in light of HNA's strong position in the fast-growing Chinese travel and tourism market, the largest outbound travel and tourism market in the world.”
“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,” said Adam Tan, vice chairman and CEO of HNA Group.
A source familiar with the matter told HOTEL MANAGEMENT that Blackstone made the decision to sell at a "premium price" thanks to the "long-term potential" of the deal.
“Both businesses are travel and tourism companies,” the source said, adding that Blackstone, which agreed to acquire Hilton in 2007, will continue to be involved. “They have two board members,” the source said, including John Gray, who is chairman of the board and global head of real estate for Blackstone Group.
Hilton, the source insisted, is not a takeover target, and any worries of that are unfounded. "It was built in proportional voting: HNA can’t increase its ownership stake without Hilton’s consent, and that’s in perpetuity," the source said.
The overhang on the stock was holding Hilton down while the company waited for Blackstone to float its shares. This deal, the source said, would take some of the worry off the tables. A two-year lock-up on the shares means that none of the shares can be sold for two years after the deal closes, which gets rid of some of Hilton's concerns.
For all three companies involved, the deal is a “win-win-win,” the source said. “Blackstone is a buy, fix and sell private equity company. They are executing on their business model and setting us up for success. HNA has deep expertise in Asia and China. And the two board seats will bring new expertise to that.”
HNA takes $6bn Hilton stake to tap tourist growth https://t.co/KfvhrzoOvh— Financial Times (@FinancialTimes) October 24, 2016
HNA's Bumpy Hospitality Road
HNA Group, like other China companies, has has a historic appetite for hospitality assets. In 2013, it abandoned plans to purchase luxury hotel chain Amanresorts chain, but acquired 15 percent of Red Lion Hotels Corp. two years later.
This year has been even more volatile. As a range of Chinese companies make plays for Western hotel assets, HNA formed a joint venture with European hotel chain NH Hotel Group to create a joint office and Chinese brand name, Nuo Han.
"The joint venture's corporate purpose is to build a portfolio of NH Hotels and NH Collection brand hotels in the midscale and upscale segments in China owned by HNA or by third parties with a target to develop 120 to 150 hotels by the year 2020,” the company said when the deal was announced.
Not long after, HNA bought Carlson Hotels and its brands, which include Radisson Blu and Country Inns & Suites, after the two parties entered an acquisition agreement.
We’re excited to share the news that Carlson Hotels, Inc. has entered into an agreement to join HNA Tourism Group: https://t.co/TDvGATJKb0— CARLSONREZIDOR (@CARLSONREZIDOR) April 27, 2016
“HNA has been in the acquisition mood lately, but like most other mainland Chinese investors, they need to have a proper game plan with professional evaluation prior to their hospitality acquisitions in order to ensure success later,” Michael Chin, executive chairman of WT Global Hospitality Investment Co in Hong Kong, said at the time. “They will certainly try to make further hospitality acquisitions in the near future.”
In spite of the headline-making deals, there were grumblings. Some shareholders saw the Carlson acquisition as a conflict of interest since HNA's Spanish subsidiary Tangla Spain owned 29.5 percent of the NH hotel group, and Carlson competes with NH in European markets such as Germany and Belgium. At the time, HNA said that it had been "disenfranchised" by the decision and expected the new board to act in the interest of all shareholders.
In June, shareholders in NH Hotel Group voted to oust one of its co-chairman and three other board members appointed by HNA Group over the potential conflict of interest. NH Hotel Group CEO Federico González Tejera was also dropped, a move that HNA, in a statement, called "reckless" and "punitive."
Last month, HNA filed a lawsuit against NH Hotels to prevent the ousters, insisting that NH reinstate HNA’s four board representatives and establish a “Special Committee of the Board” to monitor potential conflicts of interest that may result from HNA’s proposed acquisition of Carlson-Rezidor. It also demanded that the company recognize the vote of the majority of NH Hotel shareholders by reinstating Federico González Tejera as CEO.
Details of the Hilton Deal
As part of the transaction, HNA has entered into a stockholders agreement with Hilton, and into similar agreements with Park Hotels & Resorts and Hilton Grand Vacations, effective upon closing. The agreement allows HNA to appoint two directors (one HNA member and one independent member) to Hilton's Board of Directors, bringing the total to ten members.
Pursuant to the agreement, HNA has agreed to certain restrictions on its ability to sell any of its interest in Hilton for a two-year period, and to limitations on HNA's ability to acquire more than 25 percent of Hilton's outstanding shares, without Hilton's consent. Under the agreement, HNA will vote its shares in excess of 15 percent proportionally with other stockholders, subject to certain exceptions. Blackstone will continue to have two seats on Hilton's Board, including Jon Gray who will remain chairman.
In an analysis of the deal, Baird Equity Research wrote that it viewed the deal positively.
"It demonstrates the undervalued nature of Hilton's shares, solidifies our belief that foreign capital remains active in its pursuit of high-quality hotel brand/real estate investments and reduces the perceived Blackstone overhang (BX's stake will be reduced from ~46 percent to ~21 percent) given that HNA has a two-year standstill agreement and has a much longer-term investment horizon than Blackstone…Post-spinoffs, we expect Hilton to be an active repurchaser of its own shares, which could lead to HNA's stake increasing above its currently contemplated ~25 percent equity interest."
Ditto for UBS:
"Reducing Blackstone's stake helps address some of the equity overhang, replacing it with a clear long-term investor. And the 15-percent premium to prior close compares to a significant discount that a secondary offering would have entailed. Certainly bodes well for the growth of the Hilton brands in China.
"Hilton is still targeting to complete spinoff at or near year end and the timing suggests HNA wants to invest long-term in all three pieces of the spun company, since HNA will have a two-year lock up on selling shares."