Blackstone’s Search for Real Estate Buyers Keeps Ending in China

(Bloomberg)—Once again, Blackstone Group LP found eager real estate investors in China.

A month after China’s Anbang Insurance Group Co. bought most of Strategic Hotels & Resorts Inc. from Blackstone, the New York-based company said Monday that it’sselling about one-quarter of  Hilton Worldwide Holdings Inc. to Chen Feng’s HNA Group for about $6.5 billion. Earlier this month, Blackstone agreed to sell a group of Dutch office properties to Anbang.

“Foreign capital remains active in its pursuit of high-quality hotel brand and real estate investments,” David Loeb, a senior lodging analyst at Robert W. Baird & Co., said in a research note Monday. HNA “has a much longer-term investment horizon than Blackstone” does.

Chinese firms have been stepping up investments in hotels and travel businesses around the world as outbound tourism surges. HNA in April agreed to buy Minneapolis-based Carlson Hotels Inc. and its majority stake in Rezidor Hotel Group AB, owner of the Radisson brand. HNA last year purchased a minority stake in Red Lion Hotels Corp. HNA’s ambition is to sell the full range of travel services, including booking trips, hotel rooms and airline tickets.

Stake Cut

HNA will pay $26.25 a share in cash for the Hilton shares, or 15 percent more than the hotel company’s closing price on Friday. The transaction cuts Blackstone’s interest in Hilton, the world’s second-largest hotel operator, to about 21 percent, according to a statement Monday. By selling the stake to a long-term holder, the HNA deal eases the overhang that has hampered Hilton’s stock since its 2013 initial public offering.

Hilton rose 0.1 percent to $22.94 in New York trading on Monday.

China accounted for more than half of the surge of Asian investment in overseas real estate in the first half, according to CBRE Group Inc., the world’s biggest commercial property services company. Asian outbound investment has risen more than 10-fold to $47 billion in 2015 from $4.3 billion in 2009, with the U.S. getting the lion’s share. Asian institutions, especially insurance companies, still have relatively low allocations to real estate, which offers higher yields than they can get on bonds at a time of low to negative interest rates, according to CBRE.

Blackstone in September sold 15 luxury U.S. hotels to Anbang, the Chinese company that bought New York’s Waldorf Astoria hotel for $1.95 billion last year and made an unsuccessful run at Starwood Hotels & Resorts Worldwide Inc. in March.

For a QuickTake on the shopping spree by Chinese companies, click here.

China Acceleration

The Hilton deal, expected to be completed in the first quarter, helps both HNA and Hilton accelerate their businesses in China, one of the fastest-growing hotel markets, as well as capture a greater share of international tourism. HNA, based in Haikou City, owns Hainan Airlines and the second-largest online travel business in China.

The agreement allows HNA to appoint two directors to McLean, Virginia-based Hilton’s board. HNA also will own a pro-rata stake in Park Hotels & Resorts, the planned spinoff of Hilton’s real estate, and Hilton Grand Vacations, the company’s timeshare business, according to the statement. Both are set to be spun off around the end of the year.

HNA, which will become Hilton’s largest shareholder, can’t sell any of its stake in Hilton for two years and can’t increase its holding to more than 25 percent without Hilton’s consent, according to the statement. HNA also agreed to voting rights that would keep part of its stake aligned with other shareholders.

Blackstone Ownership

Blackstone is tripling its money in its sale of shares to HNA. The New York-based firm’s cost basis in Hilton is about $8.60 a share. Blackstone’s finite-life private equity funds require the firm to cash out of investments by a certain deadline. It will likely continue to sell down its stake, especially as Hilton shares climb.

Blackstone bought Hilton in October 2007 for $26 billion in what was the last major real estate buyout before the financial crisis. The enormous debt burden from the buyout, a joint deal between Blackstone’s real estate and private equity funds, needed to be restructured when credit markets seized up and forced Blackstone to put in an additional $800 million of cash to salvage the deal.

After expanding its room count by a third under Chief Executive Officer Christopher Nassetta, Hilton went public in December 2013 in a record IPO for a hotel company, raising more than $2.35 billion. Hilton has increased its room count by more than half under Blackstone.

The overhang of Blackstone’s majority ownership, however, capped gains in Hilton stock, which has risen 16 percent, including reinvested dividends, since the IPO. By comparison, Marriott International Inc. shares have returned more than 51 percent. Marriott last month acquired Starwood Hotels to create the world’s biggest hotel operator.

JPMorgan Chase & Co. advised HNA and Evercore advised Hilton’s board, according to the statement.

HNA Acquisitions

HNA Group, started in 1993, has transformed itself from a traditional aviation company to a conglomerate whose businesses span finance, leasing, hotels and real estate. The company said it has $90 billion of assets, $30 billion in annual revenue and an international workforce of nearly 200,000 employees across North America, Europe and Asia.

Chen, who started Hainan Airlines more than two decades ago, has said his goal is to make HNA Group one of the world’s top 100 companies by 2020 and among the top 50 by 2030.

The Hilton investment “is consistent with our strategy to enhance our global tourism business, and we look forward to working together on new initiatives that leverage our respective strengths, expertise and tourism platforms,” Adam Tan, vice chairman and CEO at HNA Group, said in the statement.

Airline Businesses

The company this month agreed to buy the aircraft-leasing business of CIT Group Inc. for $10 billion, a deal that came months after HNA completed the purchase of a stake in Azul Linhas Aereas Brasileiras SA, Brazil’s third-largest airline. It also agreed to buy part of Virgin Australia Holdings Ltd. and acquire Swiss airline caterer Gategroup Holding AG, after taking over airport luggage handler Swissport International Ltd. in February.

Chen and his brother, Chen Guoping, are the co-founders of HNA, although neither is believed to have a controlling stake. The group’s largest shareholder is said to be a charitable fund called the Hainan Province Cihang Foundation, which is headed by Zeng Haorong, the former mayor of Haikou.

With assistance from Sree Vidya Bhaktavatsalam, Robert Olsen, Prudence Ho and Neil Callanan.To contact the reporter on this story: Hui-yong Yu in Seattle at [email protected]
To contact the editors responsible for this story: Daniel Taub at [email protected] Christine Maurus

© 2016 Bloomberg L.P

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