In October, Hilton (NYSE:HLT) CEO Chris Nassetta mentioned that his company was pursuing "strategic alternatives." Last Friday, we learned where that pursuit had led when it was announced that Hilton plans to split itself into three new, publicly traded companies.
In this clip from Industry Focus: Consumer Goods, Sean O'Reilly and Vincent Shen explain the role each of the three companies -- Hilton Worldwide, Hilton Grand Vacations, and the company's REIT -- will serve, and when we can expect to hear more detailed numbers. The hosts also take a look into tax-free REIT spinoffs, why companies all over were getting into them (or being pressured by activist investors to do so), and why that avenue is now closed for businesses.
A transcript follows the video.
This podcast was recorded on March 1, 2016.
Sean O'Reilly: So, moving on to our big story of the day, I think the actual news broke on Feb. 26?
Vincent Shen: Yeah, they announced it with their earnings.
O'Reilly: Hilton is officially making the split, following in the footsteps of Marriott, although Marriott took considerably longer to do it. So, they're splitting into what three businesses, Vince?
Shen: So, just to give you a little bit of background ...
Shen: No, that's fine. For, I think it was October of last year, the CEO, his name's Chris Nassetta, he had announced that Hilton was pursuing some strategic alternatives, looking into what options they potentially had ...
O'Reilly: My favorite two words in corporate America.
Shen: (laughs) And, specifically, they had requested a ruling from the IRS for its REIT spinoff not long after October, and they actually did it. The timing worked out very well for them, where they were able to get that ruling just before legislation went into effect where, basically, Congress banned the further use of these tax-free REIT spinoffs.
And it's really the tax-free ones that are so attractive, and have been so attractive to companies. Some big, high-profile ones that have happened recently -- at the behest, often, by the way, of activists investors -- MGM did their REIT spinoff, Darden Restaurants did. Some other companies have been pressured by shareholders to do so -- I think McDonald's and Macy's -- but they chose not to. Now, that avenue is closed.
O'Reilly: It's always amazing to me -- we won't get too much into the politics here, obviously, but, one, I didn't know that was the case. I didn't know that Congress closed that loophole as part of the budget deal. I was like, what? Do you think they're mad because multiple casino companies, I think, have done this? And I was very, very surprised.
Shen: I think, overall, people like REITs for two core reasons. One, they're taxed very little or not at all at the corporate entity level.
O'Reilly: Right, as long as they pay out 90% of distributable ...
Shen: Their taxable income. Yeah. And, generally, REITs have better multiples than their traditional parent companies. So, you combine that, and Congress commented specifically that by no longer allowing these tax-free REIT spinoffs, they're going to be able to recoup several billion dollars in tax revenue over the next several years, and I think that's a big driver of this.
O'Reilly: Oh yeah, and that was my other comment. It always amazes me how many corporate actions that involve billions of dollars and hundreds of thousands of workers are done because of the tax code. Because, in the '80s, in the buyout boom, one of the rationales was, "Oh, load these companies up with debt, because the debt expense is tax deductible! Yay!" And it's funny to me. Anyway, what are Hilton's exact plans? Because they haven't been super specific yet.
Shen: So, getting back to your original point of what the three entities are. So, you have Hilton Worldwide now. Then, there'll be two spinoffs. The first is the REIT, and the REIT's going to get about 70 owned and leased properties from Hilton Worldwide's portfolio, about half of its portfolio, actually. Those 70 properties include mostly upscale U.S. hotels. It represents a total of about 35,000 rooms. And then, in addition to that, they're also splitting off their timeshare business. The timeshare company takes about 50 properties in the U.S. and Europe, and it's also going to run with the current management team of that business.
O'Reilly: That division's huge, by the way. It's way bigger than I thought it was. It's, what, 12% of their top line or something?
Shen: 12% of total revenue, exactly. So, that business is going to enjoy an exclusive agreement with Hilton, so they can market and operate results under the Hilton Grand Vacations brand. And then, Hilton itself is going to largely run as an operating company for its namesake hotels, and also some of the other brands in its portfolio, like DoubleTree, Waldorf Astoria, Conrad. One company, three new entities. They're hoping to complete the deal by year end.
There's not as many details as I would like to share with our listeners right now. Basically, during the earnings call, everybody was asking questions about this, and they're answering as much as they can, but ultimately, they're saying, "Listen, we have filings coming in the second quarter where it's going to be much heavier in terms of the numbers, and allow you to do your analysis."