Hello everybody, welcome to week 2 of the newsletter! In 6 days (at the time of writing), we have grown to 215 subscribers. This is all through one social media post, a few group chat posts, and word of mouth. Not too shabby.
It means a lot that you think what I have to say is meaningful enough to pollute your mailbox, so thank you for that and I hope to keep up the quality and momentum of the first week.
If any of you have ideas on how to scale this operation up, I would love to hear your thoughts - just send a message to me on my LinkedIn.
To all of those of you who are new, expect a deal analysis every Monday and Wednesday, and an interview every Friday.
With that being said, let’s dive in!
Outline
Today, I bring you one of the most successful LBOs of recent times (if you forgot what an LBO is, it’s covered in my post here): Blackstone’s acquisition of Hilton in 2007.
On one side, we have Blackstone. These guys are titans of the PE industry, with current assets under management of around $900b. On the other side, we have Hilton - a stalwart of the hotel industry, known as much for their corporate hospitality deals (looking at you, management consultants) as for their luxurious rooms.
I know it sounds boring - PE and hotels. But you guys want to be bankers, lawyers, or other capitalist archetypes, so you know what you signed up for. Despite the boring appearances, however, this deal has a very interesting twist. Here’s a clue: Hilton’s main assets are real estate, and the Financial Crisis started one year after Blackstone’s acquisition. What we will see in the deal analysis is a masterclass in financial engineering as well as strategic expansion, all in the face of a brutal recession.
Timeline
2007: Blackstone takes Hilton private through an LBO. Blackstone pays $26b, $20.5b of which is financed through debt, working out to $47.50 per share.
2008: Global Recession hits, annihilating Hilton’s value sheet for the year. Hilton drops in value by $4b. It’s not looking good.
2008-2013: The wizards at Blackstone get to work, financially engineering their way out of this recession-driven chaos. They restructure Hilton’s debt in 2010, giving it some breathing space. Strategy-wise, Hilton introduces a franchising model to grow faster than through acquisition and launches new brands in Europe and China - markets previously ignored by Hilton.
2013: Blackstone lists Hilton on the stock exchanges again.
2013-2018: Blackstone offloads their stake in Hilton over the years, capturing significant value from Hilton’s rising share price (see graph at end of timeline).
2018: Blackstone finally finishes offloading their stake in Hilton, realising profits of nearly $14b. This represents a 3x return on investment - pretty much unheard of for a deal of this size.
Analysis
To understand how this deal was so bloody effective, I propose we split the analysis into two areas: financial and strategic.
Financial innovation:
Yes, the financial crisis brutalised Hilton’s balance sheet in the short run, but it provided a very interesting opportunity for Blackstone: loan renegotiation. Hilton, like all large companies, owed a lot of money to a lot of banks. Usually, these banks securitize this debt (e.g. breaking up a $1b debt into lots of small loans and selling the obligation on to others) in order to reduce their risk in the short run. However, the collapse in real estate prices during the financial crisis meant no one wanted anything to do with Hilton's debt - so these poor banks couldn’t shift this debt off their balance sheets. This gave Blackstone to renegotiate Hilton’s debt and delay payments, giving Hilton that crucial breathing time to expand by implementing new strategies.
Strategic innovation:
I do not think financial engineering in and of itself creates value. I know this may come as news to some of you (especially my Hardo colleagues at the LSE), but shifts in the product of a business and long-term strategy are far more value-accretive than debt restructurings.
So, what did these guys do that was so damn smart? Well, not much really.
Hilton started franchising out their hotels, instead of buying entire chains like they were doing previously. This ensured they didn’t take on loads of debt through acquisitions, and instead earned predictable cashflows from franchisees;
Hilton launched multiple other brands (Curio, Tru, Canopy) aimed at different demographics of the market. By diversifying, they increased their Total Addressable Market (TAM) and had doubled their rooms to 900,000 by 2018.
These strategies sound simple but must have been extremely hard to implement during such a tough macroeconomic climate and with a company of this scale. This quotation, from Hilton CEO Christ Nassetta, sums up why I think they were so successful:
‘If you’ve got a strategy, work the strategy, work it to the times, and you’ll get to the other side’.
So, I guess the lesson from this deal is one of consistency: you can be the smartest banker, most logical lawyer or most calculating consultant, but if you lack the ability to perform during uncertainty or over long periods of time, you will get smacked by the cold hand of the free market.
Thank you for reading!
Well guys, thank you for getting this far. I’m very happy this newsletter is receiving so much attention, and I’ve got a very special interview lined up, so look out for that.
Special thanks go to Louis Berg of Investing Volt and Amin Mohsin of Clio for helping me find some new readers of the weekend, I truly appreciate it. Both are great organisations for those wishing to enter finance and I suggest you join them (for free) immediately.
Best,
Alex
Further readings
David Rubenstein, ‘Why the $26 Billion Buyout of Hilton Was So Successful’
Ludovic Phalippou, ‘Hilton Hotels: Real Estate Private Equity’ (what is it with academics and boring titles??)
Reuters, ‘Blackstone to end its stay at Hilton after 11 years’
Orchid Global Markets, ‘Case Study: A Look Back on Hilton’s LBO By Blackstone’
The Strategy Story, ‘Blackstone and Hilton Hotels: The Beauty of LBOs’