Bitter-suite deal

12 Sep 2013 By Jeffrey Goldfarb

Blackstone has engineered a nice upgrade during its Hilton stay. The private equity firm started the checkout process on Thursday, filing with the U.S. securities regulator to offer shares to the public six years after its leveraged buyout of the global hotel conglomerate. Prospects once looked dire, but Hilton Worldwide now looks on the verge of generating a decent return for Blackstone.

Coming hot on the heels of the firm’s own initial public offering in 2007, the $27 billion acquisition was so huge it even briefly stole headlines from then ubiquitous family heiress Paris Hilton. Blackstone’s $5.6 billion equity check is the biggest it has ever written. Along with the $38 billion takeover of Equity Office Properties, Hilton vaulted Steve Schwarzman’s shop into the real estate big leagues and recently helped make a billionaire of Jonathan Gray, head of Blackstone’s property arm and Hilton’s chairman.

It wasn’t long, though, before the deal seemed headed for disaster. Hilton descended into the recession with some $20 billion of debt. Though Blackstone had built cushions into the financing, the sharp decline in travel and spending nevertheless hurt the hotelier and its ability to cover some $900 million of annual interest payments. Based on the valuations of publicly traded peers, the buyout firm’s equity in Hilton at one point had halved in value – or worse.

Blackstone restructured the company’s debt, slashed costs and injected another $800 million of equity in 2010 while sticking to at least some of its original growth ambitions. Some $4 billion of debt was eliminated, Hilton’s headquarters were relocated from posh Beverly Hills to the Virginia suburbs and the number of rooms available from chains such as Embassy Suites and Hilton Garden Inn expanded from about 500,000 to more than 660,000.

The doggedness is now close to paying off. Hilton’s adjusted annual EBITDA has increased by a third over the last few years to $2.1 billion. According to Thomson Reuters, the Marriott, Hyatt and Starwood enterprises are valued on average at 13.4 times EBITDA. On the same multiple, Hilton is worth $28.1 billion. Back out some $15.1 billion of debt and that would mean Blackstone roughly doubles its money, for an annualized internal rate of return of about 13.5 percent. That’s no five-star result by private equity standards, but is still satisfying after a stressful journey.


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