Blackstone’s $26 Billion Hilton Deal: The Best Leveraged Buyout Ever


In the early spring of 2009, with the recession deepening, Christopher Nassetta stood alone in an empty house in Arlington, Va., surrounded by moving boxes and trying not to despair. What he hoped would be the crowning achievement of his career—executing, as chief executive officer, the turnaround of Hilton Worldwide Holdings (HLT), the legendary hotel company founded by Paris Hilton’s great-grandfather—had turned nightmarish. He’d just returned to the East Coast after closing Hilton’s Beverly Hills headquarters, and that was the least of his troubles.

Eighteen months earlier, in the fall of 2007, Blackstone Group (BX) had bought Hilton in a $26 billion leveraged buyout at the height of the real estate bubble. Jonathan Gray, Blackstone’s global head of real estate and the architect of the Hilton deal, invested $5.6 billion of Blackstone’s money and had big plans for revitalizing the chain, the epitome of cosmopolitan glamour in the Mad Men era. Central to Gray’s plans had been hiring Nassetta away from Host Hotels & Resorts (HST), where he was CEO.

At Hilton, the two got off to a decent enough start, but then, as the financial crisis hit and the economy tanked, it appeared that Blackstone and its partners had paid too much, used too much debt, and couldn’t have picked a worse moment to close the deal. Some of its partners—among them, Bear Stearns and Lehman Brothers—would soon cease to exist. After Lehman’s collapse, tourism went into a severe slump, Hilton slumped, too, and it appeared that all of Nassetta’s bright ideas for restoring the chain’s luster would never get implemented. Adding insult to injury, rival Starwood Hotels & Resorts Worldwide (HOT) sued Hilton in federal court, alleging that Hilton employees had stolen the plans for its successful W Hotel franchises in what it called “the clearest imaginable case of corporate espionage, theft of trade secrets, unfair competition, and computer fraud.” The Department of Justice began investigating Starwood’s charges.

“Revenue’s running down 20 percent,” Gray recalls. “Cash flow is down around 30 percent. We get a huge suit. The DOJ opens up an investigation. It was definitely a low moment in the deal.” Blackstone was in serious danger of losing the bulk of its $5.6 billion. “I promise you this is the absolute bottom,” Nassetta recalls Gray telling him that summer, bucking himself up, too. “How can it get any worse than this?”

Four years later, when Blackstone took the company public in December 2013, its timing proved impeccable. And this July, when Hilton’s stock closed at $24.80, Gray and Nassetta had officially transformed Hilton into the most lucrative private equity deal ever, with a paper profit of $12 billion.

One key to this good fortune is obvious: the historically low interest rates maintained by the Federal Reserve. But plenty of other deals benefited from low lending rates, too, and fell apart. In fact, of the nine hospitality and lodging LBOs completed in the same time frame as Blackstone’s Hilton acquisition, only Hilton and La Quinta Inns & Suites (another Blackstone deal) weren’t forced into bankruptcy or a debt restructuring.

The full story of the richest LBO in history is actually a story of private equity working as advertised. By persuading its lenders to exercise forbearance, restructuring its debt before it had to, and practicing smart management, as opposed to indiscriminate cost cuts and pink slips, Blackstone made Hilton perform better than most thought possible.

“There weren’t many people in the room with me who still believed,” Gray says of 2009. “But the good news is we were able to say, ‘Look, we’ve got plenty of cash’—I don’t think we ever went below a billion dollars in cash on our balance sheet—and, ‘We really believe in this business.’ ” Still, he confides, he had to filter out the negativity while he waited for things to improve. “It’s no fun reading that you’re not very smart.”

While he’s familiar to some investment bankers because of Blackstone’s history of savvy real estate deals, especially the purchase of Equity Office Properties Trust, Gray, 44, is little known outside Wall Street. A billionaire (his Blackstone shares are valued at about $1.3 billion), he’s a Phi Beta Kappa graduate of the University of Pennsylvania and determinedly low-key—“annoyingly calm,” his wife, Mindy, says. He prefers philanthropy to a Hamptons manse, spending time with Mindy and their four daughters over parties and auctions. He does own a five-bedroom apartment on Park Avenue but drives a Toyota minivan and wears a plastic Timex watch.



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