Hilton Worldwide Holdings Inc. (NYSE: HLT) stock opened trading on the New York Stock Exchange Thursday, popping 7.5% Thursday from its initial price of $20. Shares were up another 2.9% a little after noon Friday.
Hilton sold 117.6 million shares, raising $2.35 billion in its initial public offering (IPO).
The deal was the second largest IPO of 2013, far outpacing Twitter Inc. (NYSE: TWTR) - the hottest deal of the year - last month, and less than the $2.8 billion Plains GP Holdings LP (NYSE: PAGP) raised in the year's largest deal.
Hilton, the world's largest hotel company with nearly 670,000 rooms worldwide, is the largest hotel IPO deal in market history.
The Hilton IPO caps a remarkable turnaround since the hotel operator's private takeover by Blackstone Group LP (NYSE: BX) in 2007 - a deal that at one point looked doomed...
Hilton: Cashing in on a Hot Market
At the onset of the financial crisis, private equity firms swooped up companies when the economy tanked. Now those firms are looking to cash in when the market is surging and investor sentiment is high.
Blackstone's acquisition of Hilton was a huge story when it happened. At the time, there were many questions on whether the equity firm ultimately paid too much, after acquiring it for $26 billion.
Blackstone borrowed about $20.5 billion to buy Hilton. It used profits from the hotel chain to pay down the debt - instead of using that money for special dividends, which is often the case.
Then the financial crisis hit and reduced the value of Blackstone's Hilton investment. In 2010, Blackstone restructured the deal with its lenders.
The renegotiating helped Blackstone pay off its debt when interest rates were low. Then it continued to use Hilton profits to pay off lenders, and used cost-cutting measures to make Hilton more profitable.
The reason to come to market now is Blackstone is looking to take advantage of investor appetite for the hospitality industry. Hotels have recovered greatly since the financial crisis, and other major hotel chains are currently trading near all-time highs...
Hilton Stock Shines in Surging Hospitality Industry
HLT's positive introduction to market is a sure sign that investors are checked into hospitality stocks. The Dow Jones U.S. Hotels index has spiked almost 30% year to date.
This year's strong growth is a radical change since the recession, where hospitality (which took a beating from both consumer and business cutbacks) suffered massive downturns.
The global recovery has benefited the industry, as demand for rooms has increased. A crunch on credit and concerns about the stability of recovery, however, has created a supply issue for the market. Many hotel chains have resisted new construction, a trend that is likely to end in 2014.
Thanks to these factors, the industry has benefited from strong increases in room rates and occupancy levels, both of which are expected to increase in 2014, according to PricewaterhouseCoopers.
With strong growth in the emerging markets, the industry is currently facing supply constraints that will lead to greater development around the world. However, as banks begin to increase lending, more construction is expected.
One way that Hilton outshines the competition: It has outpaced its competitors in revenue per room - an important metric for analysts. Bloomberg projects that Hilton will likely increase its per-room profit by 6% in 2014.
What's more optimistic news for potential HLT stock investors: Hilton stock traded above its IPO level on a day the market lost more than 100 points. At a $20 IPO price, Hilton had a market cap value of $19.7 billion on Thursday morning, far more than industry rivals Hyatt Hotels Corp. (NYSE: H), Starwood Hotels & Resorts Worldwide Inc. (NYSE: HOT), and Marriott International Inc. (Nasdaq: MAR).
The fact that Blackstone didn't sell any shares in this week's IPO shows it's not attempting to gain capital, but instead increase the value of the share of the company it currently owns. This will hopefully drive up the return that Blackstone ultimately receives from Hilton. That's a short-term bullish sign for HLT stock.
But for now, it's best to take a wait-and-see approach with Hilton stock. The economy is still heavily dependent on central bank spending, and fears over a U.S. Federal Reserve QE taper could cause a pullback in hospitality industry spending, and in HLT's share price.
Today's Top Story: America's Bestselling Retirement "Plan" Is Jeopardizing - of All Things - Your Retirement
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.