The acquisition of Mint Hotels by Blackstone Group for a reported £610m has illustrated both Blackstone's taste for doing deals that make lesser investors' eyes water, but also its eagerness to build up the Hilton Worldwide portfolio before it makes an exit.
The group of eight hotels – seven in the UK and one in Amsterdam – are expected to be rebranded under Hilton's Doubletree and Hilton Garden Inn brands, despite early rumours of a ‘Mint by Hilton' brand.
Hilton, unlike companies such as InterContinental Hotels Group, has not expressed any recent interest in a new brand. It is also possible that creating a flag incorporating the Mint name would have contravened the settlement the group made with Starwood Hotels & Resorts after the aborted launch of Denizen, which prevented it rolling out any new boutique hotel brands until 2013.
After the $26bn deal to unite the two Hiltons, Blackstone is likely to feel that it wants its moneys-worth from the ‘by Hilton' brand and risking diluting it with a new brand – one which is only known in the UK – may not be a clever move when it could instead strengthen the Doubletree and Hilton Garden Inn brands, which Hilton has been looking to expand in Europe.
Commenting on the deal, David Orr, CEO and co-founder of Mint, said: "In Blackstone, the business now has a global investor with a strong and expansive track record in the hospitality sector. We feel confident that they will continue to manage the hotels in a manner that is true to its business identity." Orr made no mention of the continuation of the Mint name, adding to the likelihood that the hotels will join the Hilton stable.
Blackstone has held onto Hilton for longer than observers expected it to and possibly longer than it thought it would when it agreed the 2007 deal. The deal was the last large transaction in the sector to make it through the gate before the downturn took hold and Blackstone were widely criticised for paying so high a price.
However, earlier this year it was reported that the Hilton estate had turned profitable for Blackstone, around the same time that rumours surfaced that the group was preparing to make its exit.
Speculation around the likely exit has seen rumours of a split along geographical or brand lines, but it is thought that Blackstone is planning for a floatation in New York or London. With the global hotel development market continuing to suffer from a lack of finance, Blackstone will be eager to use its strong cash position to beat off the competition to do strategic deals such as this one.
The private equity group's second-quarter profit more than tripled on gains in the value of its buyout and real estate investments, rising to $703m. The company has seen its real estate segment continue to benefit from improving fundamentals, giving it the firepower to compete with the likes of TPG, which is thought to have come close to winning the bidding for Mint.
HA Perspective: Pinning the Doubletree badge on the Mint portfolio is a classic piece of brand stretch forced on Hilton due to the differentiated configuration of its target. It can only confuse guests about what Doubletree stands for. The same goes for the two properties switching into the Garden Inn brand.
It would have made more sense for Hilton to use Mint as an entry point into lifestyle hotels. The only problem here being that thanks to the legal spat with Starwood it is still excluded from touching this segment for another year or so.
Perhaps the biggest question surrounds the motivation of the seller. Lloyds Banking Group, via its property investment operation Uberior Ventures, was in the driving seat here and has clearly decided it wanted to some cash to shore-up its balance sheet. Mint was performing strongly and had plenty of headroom to continue outperforming its competitive set, particularly in London, as it focused on driving up room rates to reach their full potential.
The price achieved, while undoubtedly full for the current market, could possibly have been even higher in a year or two as these room rate increases kicked in. But this does rather depend on some major potential macro-economic disasters being averted, notably a Eurozone crash and a stalled US recovery.
And given that future Mint expansion was going to expose Lloyds to significant development risk it is not surprising to see it cash out. The existing capital structure was also holding the business back: in the year to March Mint lost £24.5m and had net debt of £417m at that point.
The new senior lender, Deutsche Bank, is understood to have just £300m of exposure with mezzanine from London-listed Duet Real Estate Finance of £80m providing further support. It would take a major market meltdown to leave either out of the money.
There is considerably more risk for Blackstone but the bigger picture is clearly the increased bulk it gives Hilton ahead of its flotation. Thus this deal is more a strategic acquisition by an owner operator than a classic private equity swoop.