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Hilton to split into 3 companies

Hotel chain follows popular real estate spinoff strategy

Hilton Worldwide
Hilton Worldwide (Ferre' Dollar/CNN)

Hilton Worldwide plans to spin off its real estate and timeshare businesses, creating three publicly traded companies in an effort to lower its taxes and boost value to shareholders, the hotel giant announced Friday.

The McLean, Va.-based company intends to combine about 70 properties, many of them high-end U.S. hotels, into a real-estate investment trust. That company, able to take advantage of a lower corporate tax rate, would include about half of the properties Hilton owns and leases around the world.

Meanwhile, the hotelier’s timeshare business, Hilton Grand Vacations, will become a standalone public company. The new entity, which analysts value at about $2.1 billion, would include nearly 50 resorts in the United States and Europe.

“The spins are complicated, but I think long-term we’re going to create a tremendous amount of value,” Christopher J. Nassetta, president and chief executive of Hilton, said in a Friday call with analysts.

Real estate spinoffs have become popular in recent years. They allow companies to pay less taxes on their real estate holdings because most of their profits must be paid out in dividends. The trust can deduct the cost of the payouts, saving it on taxes. In December, Congress passed legislation prohibiting such deals, but Hilton was able to move ahead because it had sought permission from the Internal Revenue Service before the Dec. 7 cutoff set by Congress, a company spokesman said.

Analysts say shareholders are expected to benefit from the tax-free spinoff.

“By splitting the company into three entities, they become much clearer in terms of what they offer to shareholders,” said David Katz, an analyst at Telsey Advisory Group, a research firm in New York.

Hilton’s decision to spin off its timeshare business follows in the footsteps of a number of major hotel chains that have taken similar measures in recent years, including Marriott International in 2011.

Shares of the timeshare business, Marriott Vacations Worldwide, have more than tripled since then, outpacing the parent company’s stock.

“This bifurcation of the industry has been going on for many years,” Katz said. Hilton “had a very clear set of positive precedents around what happens and what kind of response you get from the market, and a very clear road map in how these could be executed.”

The transactions are slated to be completed by the end of the year and do not require a shareholder vote.

Hilton, which oversees more than 4,600 properties around the world, said it would provide more financial details about the spinoffs in regulatory filings.

The company made the announcement about the pending splits as it released financial results for the year. Revenue jumped 7 percent, finishing at $11.3 billion. Profit doubled to $1.4 billion, or $1.42 a share. Revenue per available room, a key industry metric, increased 5.4 percent for the year at comparable properties.

Shares of the company’s stock rose about 2.5 percent, or $0.50, to close at $20.70 Friday following the company’s announcement.

In 2013, when it returned to the New York Stock Exchange, Hilton ended six years of private-equity ownership by Blackstone. The chain raised $2.35 billion in its initial public offering, marking the largest IPO by a hotel firm.