Bottom line: HNA’s $6.5 billion investment in Hilton marks a new high point in Chinese global hotel buying, and signals the trend may be cresting and a downturn could come next year.
After I said just last week that China’s recent buying binge of foreign hotels may have crested, we’re seeing yet another blockbuster deal that seems to support that thesis. This latest deal is the biggest to date, and has the acquisitive HNA Group buying 25 percent of US hotel giant Hilton (NYSE: HLT) for about $6.5 billion. That would easily eclipse the other recent blockbuster deal announced just last week, when insurance giant China LIfe (HKEx: 2628; Shanghai: 601628; NYSE: LFC) said it was leading a Chinese group that would invest $2 billion in a portfolio of lower-end US hotels. (previous post)
The emerging field of Chinese players in the recent hotel buying spree seems squarely divided between 2 types of companies. One type is big institutional buyers like China Life and Anbang Insurance, the latter of which purchased the storied Waldorf Astoria hotel in New York last year for nearly $2 billion. The other is an emerging field of hotel operators led by Shanghai-based Jin Jiang (Shanghai: 600754; HKEx: 2006), which owns a major stake in French industry giant Accor (Paris: AC).
HNA seems to fall somewhere in between these two types. Based in the market-oriented and tourist-friendly southern Hainan province, the company most resembles an institutional investor with a focus on the travel sector. Its investments include China’s Hainan Airlines (Shanghai: 600221), as well as assets in other airlines and plane leasing. It made headlines earlier this year with its plan to buy Carlson Hotels, owner of the Radisson hotel chain.
This latest deal shows that HNA has plenty of cash and access to credit, and intends to keep making big global purchases. According to the its announcement, the company will buy about 25 percent of Hilton from Blackstone for $26.25 per share, representing a premium of about 15 percent from Hilton’s last closing price. (company announcement; Chinese article)
Blackstone took Hilton private in 2007 for $26.7 billion, including debt, and re-listed the company 6 years later. The stake sale would reduce Blackstone’s remaining holdings in Hilton to 21 percent, as it slowly tries to unwind the investment. I expect Blackstone probably wants to sell the entire stake in the next 1-2 years, and that HNA could buy more shares if this latest partnership works well.
This particular deal is slightly different from many of the purchases we’ve seen to date, which were mostly for actual hotel properties. By comparison, Hilton is largely a property and brand manager, which is a much higher-margin business because of its service-oriented nature and relatively low capital requirements.
The only other similar major deal we’ve seen so far is Jin Jiang’s purchase of a stake in Accor, whose brands include the Soiftel and Novotel chains. But that courtship looks rather one-way, and has mostly seen Jin Jiang buying Accor stock on the open market. Another similar strained courtship saw Anbang fail in its bid to buy Starwood (NYSE: HOT), operator of the Sheraton and Weston brands, in a deal that would have been worth $14 billion.
Questions have been raised before over whether some of these deals might run into regulatory approval, more due to political sensitivities than anti-trust concerns. That seems relatively unlikely, since the hotel business doesn’t really involve major potential for spying, which is usually the main concern.
All that said, I’ll close by reasserting my view last week that the current buying frenzy is at or near its peak, and a downturn is likely to begin next year. The 2 latest deals, combined with the failed Anbang bid for Starwood, would have a combined value of more than $20 billion alone. If the Anbang deal had succeeded, it’s probably fair to say total China buys in the space have would have topped $30 billion this year. From that kind of height there’s really nowhere to go but down, especially as China’s domestic economy shows signs of slowing.
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