Right up until 2007, Hilton was posting remarkable back to back profits within the hotel industry, with strong expansion and high returns for shareholders. But then followed a series of poor board decisions, global market downturn and an alarming economic housing bubble, set to decimate the hospitality industry for years to come. But a swift leveraged acquisition led to a change of events.
Enter The Blackstone Group – A private equity firm with $550 billion total assets under management who specialize in equity, hedge funds & credit investments.
The Buy-Out
Blackstone bought Hilton Hotel for $26 billion in a 80%-leveraged buyout in 2007, just before the financial crisis was looming. Immediately following the purchase, Blackstone lost substantial amount of money as luxury hotels in the hospitality industry flopped as the crisis began to emerge.
Financial analysts and critics labelled it as one of the worst leveraged buy outs for a private equity firm to ever make.
But Blackstone was playing the long-term game. They believed the global luxury brand to be a great global business with high potential to become a leading performer in the industry.
The Plan
Blackstone’s plan was straightforward
- Decide how to purchase Hilton
- Instate a new CEO for restructuring
- Payoff debt and make the company public
The LBO (leveraged buy out) was the purchase strategy of Blackstone to acquire Hilton. This meant that borrowing money to acquire Hilton was a cheaper option than using equity. With the interest rates falling, it meant that the use of leveraged debt would bring higher return on equity.
Then followed a new instated CEO and a complete restructuring of the company. It led to effectively managing the crisis, and paying off its debts in 2010.
Instrumental in Hilton’s revival, Blackstone’s acquisition led to acquiring 2,000 hotels, having initially announcing them as write-downs by about 70% due to the crisis. However the restructuring of its operations and expansion soon after, led to the hotel company to pay off their debt.
In 2013 Blackstone took Hilton public with a market evaluation of over $12 billion.
The Outcome
Blackstone divested entirely from Hilton in 2018. They sold their stake with an accumulated profit of $14 billion since their acquisition in 2007. They tripled their initial investment with the buyout becoming known as the most profitable in history.
The Blackstone CEO then said that the acquisition of Hilton lived up to Blackstone’s motto in investing in real estate: Buy it, Fix it, Sell it.
Bad deals are notoriously common in mergers & acquisitions. Very rarely do you see companies merge with another to realize synergistic growth. Often we hear of costly acquisitions made for the sole purpose of eradicating competitors.
I thought this was one of the best stories with regards to private equity buyouts; especially with regards to the timing of the acquisition, the benefits for both parties involved, and Blackstone’s eventual exit. HERE are more stories on famous leveraged buy-outs.
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