Rumours that Hilton Hotels Corporation is in talks with Blackstone to sell £2bn of property addresses what is arguably the key strategic challenge for the group following its £3.3bn acquisition of the hotel assets of Hilton Group.
But with a substantial chunk of the Hilton International estate already sold-off and the US disposal process all but complete, it is not entirely clear where £2bn worth of property is to be found.
The disposal talks, first reported in London's Times newspaper, are a sign that HHC is moving swiftly to remove the uncertainty surrounding the deal. HHC has ruled out issuing any new shares to fund the $5.7bn transaction and this means its existing $3.7bn debt pile will be more than doubled.
Two weeks ago, in Issue 1 of HA Perspective Online, the importance of asset sales to make the deal succeed was stressed.
The ratings agency responded as might be expected to the increased debt levels: Moody's cut the debt rating to junk status, downgrading by two notches from ba2 to baa3. S&P placed the debt on its CreditWatch with a downgrade to junk status thought likely.
Moody's said the downgrade was due to the uncertainty of the asset sales combined with the high leverage that buying the Hilton International estate would leave HHC with in the mean time.
HHC said during its third quarter conference call in October that it was determined to retain investment grade rating on its debt in the long-term although it was prepared to see this rating lost in the short-term. Asset sales are clearly the main route to achieving this since equity issuance is off the agenda.
Given that Hilton Group sold-off £535m of hotel property in 2005, selling a further £2bn means all (and more) of the entire Hilton International property portfolio is now on the blocks.
HI had gross assets of £4.2bn at June 2005, prior to the completion of most of the sales during 2005. But this comprises brand and goodwill amongst other things, as well as just property. ABN Amro estimates that the hotel real estate remaining has a value of around £1.4bn. This does rather beg the question as to where the remaining £600m or so of property is to come from if the £2bn figure is correct.
During 2005, HHC sold or put up for sale 20 properties. By mid-year it had sold 11 hotels for $416m to which it added the sale of a Boston property for $110m and the sale of the Palmer House in Chicago for $230m during the autumn.
With the remaining seven properties on the market, the total value of the disposals exceeds $1bn.
Once the remaining seven sales complete, and prior to the completion of the Hilton International acquisition, HHC will be left owning 29 hotels representing just less than 50% of total group EBITDA.
Steve Bollenbach, HHC chief executive, said that this was about the right number of hotels for the company to own. Although there are some other HHC properties the company would like to sell, these assets were either encumbered with difficult leases or tied-up with HHC's timeshare operations.
Post the Hilton International transaction, HHC will have around 43% of its EBITDA coming from owned hotels. The portion from managed and franchise was 33%.
What this shows is that HHC is, and will remain, an owner and operator of hotels. Although management and franchising is a significant and growing chunk of the business, even following a further sell-down of the property base, HHC will still be a significant owner.
By contrast, Hilton Group had reduced its owned hotel EBITDA contribution to less than a third following its own disposal programme.
A further complication is that a significant portion of Hilton International's real estate is irreplaceable assets in prime locations. HHC has set its face against divesting similar assets in New York or Hawaii and yet it has to convince shareholders that it is OK to shed them in, say, London.
Investors might reasonably ask why HHC needs to retain any of these assets at all.