An IPO is like a company’s first date with the market. Things could go well right off the bat, or they could take some warming up.
They also could start well and then you find out your date is a 9/11 truther who collects Precious Moments dolls and then things just fall apart.
The Hilton IPO — to be priced after the bell today and set to hit the market on Friday — puts potential investors in a similar position. You never know how things are going to go, so it’s important to find out everything you can about the situation beforehand.
Hilton is expected to price somewhere between $US18 and $US20.
Blackstone holds 81.5% of the company and so they’ll be the biggest winners in what could be a $US2.4 billion IPO. The firm isn’t selling any of its share in the offering.
But we can’t all be Blackstone — and there’s a lot to consider before you step out with a new company. To get both sides of Hilton’s story, Business Insider spoke with Ryan Meliker, a senior analyst, Equity Research for investment bank MLV & Co.
Here’s why you should jump into Hilton: Meliker said that the hotel industry in general is in a really good place right now. As the global economic recovery continues, demand will increase, especially in emerging markets.
“The big challenges for the industry are on the supply side,” he said. And since banks have loosened up with lending, that’s allowing companies in the hotel space to increase supply.
The headwind, Meliker added, “would be a demand shock” — an economic downturn across the world.
Fundamentally, Hilton looks great too. It outperforms industry peers in terms of revenue per room, and that’s expected to increase by up to 6% next year. The company’s revenue increased 39% between 2011 and 2012.
On top of all that, the market’s doing really well overall, so getting in on Hilton’s starting price could be a good idea if (IF!) you think that stocks will continue to rise.
On the other hand, maybe you want to wait to buy Hilton.
Meliker pointed out that Blackstone has a lockup on its investment that will expire in the next three years. When that happens, it will need to return capital to investors, and sell a bunch of its Hilton stock.
Hilton also took on $US1.25 billion of debt when Blackstone injected it with cash in 2007. As interest rates rise, that debt will become more of a burden on the company.
Looking forward, there’s chatter that Hilton will move to cut costs by moving toward an asset-based strategy. In the hotel business, that means the company will ramp up the number of hotels it manages but doesn’t own, or simply franchises. Companies like Starwood and Marriott have already headed in that direction.
That won’t happen for a while though. Hilton owns 27,000 of its rooms and 18,000 of them are locked up in a five year loan, so the company can’t sell them.
Bottom line: Meliker thinks the IPO will likely price at the midpoint (around $US19.50) and that would be good. More expensive than that, and you may want to go into wait and see mode.
We’ll see how it goes on Friday.