I.P.O./Offerings September 12, 2013, In Hilton I.P.O., a Losing Deal Turns Around By DAVID GELLES In early 2009, it looked as if Blackstone, the investment firm, had struck one of the worst deals ever. Two years earlier, Blackstone had acquired Hilton Hotels for $26 billion, one of the largest buyouts of all time. It was a big deal but just part of the prevailing trend of a heady era. Private equity shops were targeting ever-larger companies, global real estate values were booming and hotel occupancy rates were high. But after the failure of Lehman Brothers, which came five years ago this weekend, Blackstone wrote down the value of its investment by more than half in early 2009. Corporate real estate prices collapsed and visitors to Hilton’s hotels slowed to a trickle. As if that were not enough, Starwood, a rival hotel chain, sued Hilton for corporate espionage, a suit that eventually cost the company more than $75 million. But on Thursday, Hilton filed for an initial public offering, seeking to raise $1.25 billion. When it begins to trade, Hilton could be valued at around $30 billion. And in a remarkable turnaround, Blackstone expects to double its money on the investment. Blackstone’s investment in Hilton could have easily become a cautionary tale, just another casualty in an era of excess for overambitious private equity firms. It was struck at the height of the boom years, within months of other ill-fated deals. TXU, the power company now known as Energy Future Holdings, was bought by K.K.R., TPG Capital and others for $45 billion in 2007 and now teeters on the brink of bankruptcy. Freescale Semiconductor, bought by TPG, Blackstone and others for $17.6 billion in 2006, experienced a sharp decline in demand for its products, resulting in billions of losses for its private equity owners. But another Blackstone real estate deal of that vintage, the $39 billion deal for Equity Office Properties in 2006, was profitable almost immediately, as Blackstone quickly sold many of the portfolio’s trophy assets. If successful, the Hilton public offering would be a powerful vindication of Blackstone’s real estate strategy and prove that even some seemingly doomed deals can yield generous returns given enough time. “We didn’t know the storm of the century was coming,” Jonathan Gray, global head of real estate for Blackstone, said in an interview on Thursday. “We were just focusing on owning the right assets on the right basis.” Mr. Gray declined to comment on any specific deals, including the Hilton public offering. For those that held on through some of the global economy’s darkest hours, some of the big bets made just before the crisis are starting to yield generous returns. “These funds that were launched in ’06 and ’07 have come through the financial crisis, where they saw valuations hit significantly, to a point where there are good returns to be realized,” said Roger Freeman, an analyst at Barclays Capital who covers private equity. Other big buyouts made before the financial crisis have also begun to pay off. K.K.R. spent $22 billion on the European pharmacy retailer Alliance Boots in 2007 and sold it to Walgreen for a sizable profit last year. Earlier this week, TPG and Warburg Pincus sold the retailer Neiman Marcus to a group led by Ares Management and the Canadian pension plan for $6 billion, making almost $1 billion on the deal. A Hilton I.P.O. would be the latest foray into the public markets for Blackstone. In the last year it has also publicly listed Sea World, Pinnacle Foods and PBF Energy. It is also working on a public offering for shares in Merlin, its British amusement park company, according to people with knowledge of the matter. Hilton did not disclose the precise sum it was looking to raise or at what price it intends to offer shares. But Blackstone intends to continue to own a majority of the voting shares, allowing it to control the makeup of the board. In the last six years, Blackstone has managed to turn Hilton around, making it an increasingly dominant force in the global hotel market. Revenue in 2012 was $9.3 billion, up 15 percent from 2010. Adjusted earnings before interest, tax, depreciation and amortization were $2 billion in 2012, up 25 percent from 2010. With comparable hotel chains like Starwood and Marriott trading at around 12 times earnings before interest, taxes depreciation and amortization, and Blackstone growing at a healthy clip, its valuation could be around $30 billion by the time shares are likely to start trading early next year. According to its filing with the Securities and Exchange Commission, Hilton has increased the number of open rooms in its system by 34 percent, to 665,667. That amounts to 4.5 percent of all hotel rooms globally, according to Smith Travel Research. The company is also continuing to expand. It is responsible for 18 percent of global rooms under construction. In addition to Hilton brand hotels, the company operates the Waldorf-Astoria, Conrad, DoubleTree and Embassy Suites brands. Hilton has achieved its growth by doubling down on its strategy of licensing the Hilton brand to franchisees around the globe. These properties, owned and managed by other operators, who pay Hilton a fee, are more profitable than the hotels owned and operated by Hilton itself. It has also benefited from the strength of its international properties, which it regained control of shortly before Blackstone took it private. Not everyone made a profit on the Hilton deal. Several of the banks that provided financing for Blackstone as part of the deal, including Bank of America Merrill Lynch, Goldman Sachs, Deutsche Bank and Morgan Stanley, sold some of their debt during the crisis, losing money and missing out on a potential payout in a public offering. Still, for Blackstone and its limited partners, a successful Hilton I.P.O. will prove the value of staying the course, even through what Mr. Gray called “the storm of the century.” “The thing that we find so attractive about this asset class is that real estate is not subject to the whims of near-term capital markets conditions,” Mr. Freeman said. “They had the luxury of time on their side.”
Posted on: Fri, 13 Sep 2013 02:59:53 +0000
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