The company, one of the most recognized brands in the hotel business with more than 670,000 rooms worldwide, sold shares in its initial public offering late Wednesday at $20 a share. The pricing indicated strong demand for the IPO, given that 112.8 million shares were initially expected to be sold between $18 and $21 a share. Shares are expected to start trading on Thursday.
The deal's reception indicates strong interest by investors to get back into the hospitality industry, which had been pummeled during the recession. Investors are hopeful the industry can benefit from the fact demand for hotel rooms has improved along with the economy, but at the same time, hotel operators have resisted adding many new rooms. That combination is a potential winner for the industry in terms of pushing up room rates and increasing occupancy rates, analysts say.
"The (hotel) industry looks good right now," says Greg Leffert, analyst at IPO research firm Renaissance Capital. "Hilton going public is a good sign. It indicates solid supply and demand fundamentals," says John Staszak, analyst at Argus Research.
Investors are interested in Hilton's IPO for a number of reasons including:
• Stable hotel growth forecasted. Hotels are expected to see 5.5% growth in the revenue they collect per available rooms in 2014, says Chad Mollman, equity analyst at Morningstar. Add to that expected 1% room growth and investors are looking at an industry slated to grow by 6.5% in 2014 and again in 2015, he says. The muted room growth is attractive to investors since that means hotels should be able to increase room rates in 2014, says Esther Kwon of S&P Capital IQ. "You'll see rates tick up along with occupancy," she says.
• New business model for the industry. Hotel operators, including Hilton a! nd Marriott, have been aggressively pushing a new "asset light" business model. Rather than tying up billions of dollars owning hotel buildings, the big hotel chains are finding it more lucrative to let someone else own the property and instead collect license fees or management fees to hire staff and operate the property, Mollman says. Hilton owns just 60% of hotels bearing its brand names, a percentage that will decrease over time and make the company more profitable as a result, Mollman says.
• Changes at Hilton following its buyout. Hilton is going public again following its October 2007 buyout by private investor group Blackstone. Shortly after the buyout, the industry was hammered by the recession with revenue per available room falling 15% and the stocks dropping 75% industrywide, Mollman says. Since then, as a private company Hilton has rebuilt itself. Its number of open rooms is up 36% since the 2007 buyout and the number of room in the pipeline -- to be developed but not being built yet -- is up 60% to 185,699 rooms. The deal left Hilton with a hefty load of debt, $14.3 billion. It's not too concerning, though, as cash flow exceeds interest payments by three times and there are no major maturities until 2018, Mollman says.
• IPOs are hot. Investors' appetite for IPOs seems insatiable this year, and Hilton is likely to benefit. Companies have raised $49.9 billion in U.S. IPOs this year, up 19% from the same point last year and the best year for deals in more than a decade, Renaissance says. And the FTSE Renaissance US IPO index, which tracks the stock performance of deals, is up 54% this year vs. 25% for the Standard & Poor's 500 index.
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There certainly are risks with the Hilton IPO. Hilton shares are worth just $16 apiece, Mollman says, making the IPO too rich for most individuals at the IPO price. The new business model could depreciate! the bran! d if not managed carefully, S&P Kwon says. And there's always the risk of a political or health event that could curb travel, The "primary risk in our view would be a downtick in the expected rate of growth for the U.S. economy or, as always, external events like terrorism (or) disease," says Smedes Rose, analyst at Evercore.
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