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Published by:
Vlerick Business School (2016)
24 pages
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Hilton Worldwide is a renowned luxury hotel chain with different brands of hotels across the globe whose founder Conrad N Hilton once envisioned: 'To fill the earth with the light and warmth of hospitality'. The company has undergone a remarkable evolution since its origination in 1919. Hilton Hotels became the first publicly listed hotel chain ever on New York Stock Exchange (NYSE) in 1946. It was taken private in October 2007 by Blackstone. This transaction lists among the biggest leveraged buyouts (LBOs) to-date and resulted in one of the largest gains ever (to be) made on a single transaction, despite the financial crisis. Six years later, it had its second initial public offering (IPO) on the NYSE under the name of Hilton Worldwide Holdings Inc. Trailing its competitors and in need for financing to support its aggressive global expansion, Hilton sought an investment partner in 2007 and teamed up with the alternative investment specialist Blackstone. The preceding years were characterized by mega-buyouts at record-high prices, exorbitant multiples of EBITDA and strong use of leverage. When the financial crisis hit, the hospitality industry was primed for the calamitous fall that ensued, and few observers at the time expected anything less than a bankruptcy of Hilton Hotels. Accumulating impairment losses of more than USD5 bio, Blackstone held on to its investment and profited from the inevitable recovery that public markets failed to have faith in. In December 2013, Blackstone brought Hilton back to the stock market yet it remained the majority shareholder.This case study describes the tools at the disposal of private equity firms including target selection, the genuine improvements in management, cost-cutting and a shift to a cash flow generating model combined with pure financial engineering. Furthermore, we discuss the risks involved in LBOs, with a focus on the hospitality industry. We explore whether the high premium paid by Blackstone was justified and investigate potential alternative financing routes for Hilton Hotels. Next, we focus on the exit path and calculate the realised rate of return. Finally, the case discusses the reputation of private equity investors, the role of syndication and the impact of lock-up periods.
Learning objectives:
1. This case is intended to give MBA and/or Master in Finance students an insightful understanding of what leveraged buyouts and public-to-private (PTP) transactions entail. 2. Exploring the leveraged buyout of Hilton Hotels and Blackstone’s exit plan via IPO; the case covers, the characteristics of LBOs/MBOs/PTP and the importance of understanding the risks of a LBO target and the impact on the deal structure. 3. The identification of drivers of value creation in private equity, alternative financing strategies for growth and exit strategies for PE investors and the calculation of their return at exit. 4. The role and reputation of private equity firms, the benefits and drawbacks of syndication in transactions, frequently used terminology in buyouts. 5. (LBOs vs MBOs, lock-up period, exit channels such as IPOs, selling to a strategic buyer, a sponsor-to-sponsor exit or secondary buyout, etc).
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