Hilton ÷ Hilton = 3

December 22, 2016 09:00 AM
Hilton Worldwide Holdings (HLT) will split into three by year-end.
Hilton ÷ Hilton = 3

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Hilton Worldwide Holdings (HLT) will split into three by year-end. The plan is to spin off one company that will hold the hotels that Hilton franchises and manages; the second spin will hold its time-share properties; and a third to be spun off as a real estate investment trust that includes its owned hotels. The split-up should drive improved capital allocation, lower taxes and stronger growth, leading to enhanced shareholder value. 

The move to separate Hilton Grand Vacations, the timeshare unit, is a key positive and could generate substantial shareholder value for Hilton.  A similar spin-off of its timeshare unit by rival Marriott International a few years back led to the spun-off timeshare unit’s stock price nearly tripling.  

Hilton is one of the world’s largest hoteliers with a lodging empire that includes more than 4,600 hotels and resorts in about 100 countries operating under such names as Doubletree, Embassy Suites and Hampton Inn, as well as its flagship Hilton brand. Many of its hotels serve the mid-market segment, though its Hilton and Conrad hotels offer full-service, upscale lodging. In addition, its Homewood Suites chain offers extended-stay services. The company franchises many of its hotels; it owns the Waldorf-Astoria brand and the New York Hilton.  

With the spin-off pending, we value Hilton on a sum-of-the-parts basis. We value each of the two proposed spin-offs and the parent to arrive at the valuation for the consolidated firm, Hilton Worldwide. We value the REIT spin-off, Park Hotels & Resorts at 11.0x P/AFFO (Adjusted Funds from Operations) 2017, in-line with its peer, Host Hotels and Resorts (HST). This suggests an equity value of about $3 billion or $3 per Hilton share.

We value the timeshare business, Hilton Grand Vacations and the Hilton Worldwide (parent) based on the blended relative valuation of 2017 Sales and EBITDA estimates. Our multiple for Hilton Worldwide is a blended valuation of 2.7x EV/ 2017E Sales and 13.5x EV/ 2017E EBITDA. This suggests an equity value of $2.25 billion for Hilton Grand Vacations (or about $2.25 per Hilton share). Hilton Worldwide (the stub) is valued at about $19.5 billion or $19.75 per Hilton share.  The three estimated valuations imply a consolidated valuation of Hilton Worldwide of $25 (vs. $22.30 for HLT on Nov. 2).

We remain encouraged by the precedent of similar spin-off transactions creating significant shareholder value considering a jump in margins on higher fee revenue. Despite the increasing competition, we expect Hilton Worldwide (consolidated) to continue to deliver margins in excess of those of its peers. The company’s move towards a relatively asset-light model should significantly boost margins further.

About the Author

Joe Cornell is a chartered financial analyst, a finance MBA and the author of McGraw-Hill’s “Spin-Off To Pay-Off.” As the founder and publisher of Spin-Off Research (www.spinoffresearch.com) he is widely-regarded to be among the foremost experts in this specialized area. @spinoffresearch