This presentation is about the Hilton hotels buyout. We analyze the case with different methods and our conclusion is that it was good deal for both Hilton and Blackstone.

1. PRIVATE EQUITY COMPETITION: HILTON LBO
FINNOVATORS
JIN HO KIM
HYUNG YOON KIM(STEVE)
NATALIA MURCIA
FRANCESCO ROMEO

2. SUMMARY
• Hilton’s needed funding to implement its aggressive expansion
strategy
• Blackstone was the best partner because of its expertise
• LBO with high debt under favourable condition
• High risk but well structured operation
• IPO best exit strategy because of bullish IPO market
• At IPO the company debt went down by 41%
• Blackstone had a satisfactory return (at IPO valuation) 
14.9% or 2.3x
• Not selling the shares at IPO was the right strategy ( +14%
after six months)

3. CASE DEBRIEF
PRE-BUYOUT POST-BUYOUT POST-IPO
• LBO Boom
• Privatization trend in
the U.S
• Need funding for the
future projects
• Hilton’s assets served
as collateral
• Blackstone’s Expertise
• Privatization done
before the crisis
• Term re-negotiation
after the crisis
• Restructuring and
operation efficiency
• IPO was the best option
to exit for the
profitability
• Good performance in
terms of operation
• Good investment
return(14.9% annually) in
terms of profit

4. WHAT IS TYPICAL FEATURES OF LBO TARGETS?
Yes No
• Mature industry and company
• Feasible exit option
• Strong competitive advantage and
market position
• Low EV /EBITDA multiple
• Large amount of tangible
• Assets for loan collateral
• Potential for expense reduction
• Clean balance sheet with no debt
• Strong management team and
potential cost-cutting measures
• Low working capital requirement
• Low future capital expenditure
requirement
• Possibility of selling assets
• Steady and predictable cash flows
Even though it didn’t meet all the criteria, the LBO was under a traditional proposal

5. THE HILTON ACQUISITION WAS AN LBO/MBO/PTP
• Why debt financing in LBO?
 Higher debt expect higher return on investment (Leverage effect)
 Bank debt is a lower cost-of-capital (lower interest rates) compared
to equity
 Tax shield effect
• Usually, LBOs are also MBOs. Why?
 Most of LBOs are MBOs because they have the power to change the
management
 Purpose of MBO is to avoid external buyout or to implement
growing plans by management team of the target company

6. WAS THIS A RISKY DEAL?
A broad Risk Assesment of investing in the Hotel Industry
• Main risk factor for Hotel industry is market situation because the service
is used when people have extra money
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Booked hotels room S&P 500 index(2003.1~2013.12)

7. WAS THIS A RISKY DEAL?
• Given the deal structure, was the 2007 transaction a risky one?
Equity: 5.7 bio
(21.76%)
Debt: 20.5 bio
(78.24%)
Value of
transaction:
26.2 bio
(100%)
• The deal looks risky because it was with
78.24% of debt
• However, it is not as it looks like

8. WAS THIS A RISKY DEAL?
• The economic situation and Debt capacity of Hilton group
According to the article:
1. 2006 was a record year for PE
sector with 874 bio of invested
capital
2. Increase in availability of
covenant-lite loans
3. General trend of privatization
of America Industry
In 2006, Hilton Group just
finished the acquisition of HT
international:
1. Its debt amount increased
significantly
2. But leverage ratio didn’t
change much because much
portion of debt came from non-
interest bearing debt
Economic Context Economic Status

9. WAS THIS A RISKY DEAL?
• The leverage ratio of the Hilton hotel
• Non-interest bearing debt
$Mil 2004 2005 2006
Long-term debt 3,633 3,572 6,556
Current maturities 14 47 412
Total Asset 8,242 8,743 16,481
TA/LTB 2.26 2.42 2.37
$Mil 2004 2005 2006
Account Payable 611 772 1,901
Deferred taxes 781 678 2,065
Economic situation was favorable, and there was no trouble sign of
Debt level in Hilton group

10. WAS THIS A RISKY DEAL?
• For the debt financing, Syndication debt financing was used from reputable
financial institutions: In an financial event, Syndication loan brings
diversification effect
• Also the loans were accompanied with low cost due to the Real Asset collateral
Debt: 20.5 bio
(78.24%)

11. WAS THIS A RISKY DEAL?
• Overall, the deal was risky because of the huge amount of debt, but the deal
was under well structured plan with favorable condition
– The company utilized many instruments to hedge the risks
Good financial status
Sydication loan from reputable financial institutions
Low interest rate thanks to Real Asset collateral
Conditions

12. BLACKSTONE OFFERED A HEFTY 40% ACQUISITION PREMIUM
• General Key sources of value creation in LBO
• In case of Public-To-Private(PTP), we can expect
Leverage brings substantial tax-shield
The level of regulatory requirements and investor communications
are reduced
More discretion on the management by replacing passive shareholders
Existing clients and monopoly business
Stable cash flow from natures of services

13. BLACKSTONE OFFERED A HEFTY 40% ACQUISITION PREMIUM
• Private Equity Sponsor VS Strategic Buyers
• Private equity sponsors also
know as Financial buyers have
purposes to identify private
companies with attractive
future growth opportunities,
giving them desired return
• Strategic buyers have
purposes to identify
companies whose products
or services can synergistically
integrate with their existing
P/L to create incremental
long-term share holder value
Private Equity Sponsor Strategic Buyers

14. BLACKSTONE OFFERED A HEFTY 40% ACQUISITION PREMIUM
• How did Blackstone justify?
– Blackstone was a leading real estate private equity company, owing
more than 100,000 hotels rooms in the U.S and Europe
– At the moment, it had the successful track record of reinvesting in its
hotel properties, La Quinta Inns and Suites, and LXR Luxury Resorts and
hotels, leading them to grow approximately 45%
– Hilton hotel was the one fitting well to Blackstone’s business strategy
and expertise
Jonathan Gray, Senior Managing Director, Blackstone, commented, "It is
hard to imagine a better strategic fit for us than Hilton with its
world-class people, brands and network of hotels. This transaction is
about building the premier global hospitality business.” 07/03/2007

15. 40% PREMIUM, OVER PRICED?
Acquisition price $47.5
Original Price $33.93
Multiple method: P/E
Peer group EPS Share price P/E ratio
Marriott 1.50 38.31 25.54
Accor 2.33 19.41 8.33
Starwood 4.91 51.64 10.52
Average 2.91 36.45 14.80
EPS Current price Share value
Hilton 1.49 33.93 $22.04

16. 40% PREMIUM, OVER PRICED?
Multiple method: Market cap/EBITDA
Peer group EBITDA Market CAP ratio
Marriott 1,199 11,500 9.59
Accor 1,248 12,500 10.01
Starwood 1,145 13,170 11.50
Average 1,197 12,390 10.37
EBITDA Market CAP Share price
Hilton 1,274 17,784 $46.33

17. 40% PREMIUM, OVER PRICED?
EV(DCF) method
Debt: 6,556
Equity: 1,023
86.5%
13.5%
Long-term debt
Common equity
Risk free: 4.61%
Market return: 10.53%
Market Beta: 1.18
Tax rate: 30%
Cost of Debt: 5.60%
After tax
Cost of Equity: 17.03%
CAPM model
WACC:
7.14%

18. 40% PREMIUM, OVER PRICED?
• Method to calculate the value
– Perpetuity method (Discount cash flow)
– Predict the Free cash flow in 2007, and discounts it with required rate of
return minus growth rate
2007 (prediction)2006
FCF1 FCF2g
present
Value
Discounted @ r

19. 40% PREMIUM, OVER PRICED?
• Considering the hotel business, which is unpredictable, we may need to add
1~3% of risk premiums to WACC
DR/GR 3.00% 4.00% 5.00% 6.00% 7.00% 8.00%
7.14% 59.60 84.98 134.04 268.95 2290.69 -405.75
8.14% 44.69 60.34 85.96 135.48 271.64 2312.26
9.14% 34.64 45.29 61.09 86.94 136.92 274.34
10.14% 27.40 35.14 45.89 61.83 87.92 138.36
11.14% 21.93 27.83 35.64 46.49 62.58 88.90
12.14% 17.67 22.31 28.26 36.14 47.09 63.32
13.14% 14.24 18.00 22.69 28.69 36.64 47.69
14.14% 11.43 14.55 18.34 23.07 29.12 37.15
15.14% 9.08 11.71 14.85 18.68 23.45 29.55
Share price range Share price profile
Share was over-priced for normal
situation but growth rate can justify
the price of $47.5
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
3.00%
4.00%
5.00%

20. ALTERNATIVE SOLUTIONS TO FINANCE HILTON’S GROWTH
• Issue Equity
 Expensive because of legal, accounting and investment banking fees
and cost of capital
 Lose control of a company
 Dilution of Equity
• Ask for more debt
 More risky of insufficient cash flows to pay more interests

21. SATISFACTORY RETURN
• Good deal compared to the historic average return of Buyouts
• Not great considering the average return of venture capital (16.6%)
8.5 BIOs
Blackstone
Net Gain (or
a multiple
of 2.3)
14.9%
Blackstone
return on
investment
12.2%
U.S.
Buyouts
Return
(1987-2006)

22. EXIT STRATEGY
Raise capital to pay back more than 20 bio debt. After the IPO the
debt went down by 41%. The terms for the agreement were
favourable .
Growing stock market. Blackstone had a firm belief in a bullish IPO
market. In November 2014 the stock price was 25 (+20% compared
to initial share price of 20).
IPO
If the company valuation was the same (19.7 bio) probably yes,
because the lock-up agreement prevented the Blackstone from
selling its shares for the next six months, and even though the stock
market was recovering, it was still a risk...
- In theory yes if valuation of the company > 20;
- Not attractive for a potential investor because debt > 20 BIO;
- Blackstone was very confident about a bullish IPO market.
SECONDARY
BUYOUT
TRADE
SALE

23. LBO IS GOOD OR BAD?
- Can save the company from failure, creating
value for both the original shareholders, the
employees and the Private equity.
- Overall the LBO can increase the long-term
value of the company.
- Innovation is created.
- If LBO result in dismantling the acquired
company (cut and run), no value is created for
the company and the only beneficiary is the PE.
- Risk of massive layoff as part of the
restructuring process. Managers can lose their
job.

24. SYNDICATION – BENEFITS & DRAWBACKS
• Benefits
 Possible to secure a massive capital efficiently in same condition
 Possible to use negotiating power and credit of lead manager
(Bookrunner)
 Possible to spread credit risk of target company
• Drawbacks
 Complicated interest for collateral among concerned banks
 Variable interest rate can be loss in the future

25. BLACKSTONE DID NOT REALIZE THE GAIN, WHY?
There are 2 reasons that Blackstone did not realize the gain
– Lock-up period which prohibited Blackstone to sell its shares for certain
period
– Expectation and Confidence in price increase

26. NO DIVIDEND POLICY, GOOD OR BAD?
• Hilton has been focused on reducing its high debt levels with an
aim to become an investment-grade company
– Current Hilton’s ratings from S&P is BB, which is still speculative grade
(Above BBB is considered as Investment grade)
– The zero-dividend is compensated with less risky security as the debt
level decreases
Considering its goal, we believe that zero-dividend policy is
appropriate not only for Hilton but also shareholder

27. HILTON’S SHARE RISE BEFORE LBO ANNOUNCEMENT
Share price was expected to rise after LBO
announcement, because the buyer usually pays a
premium price.
There were rumors of possible bids starting to
impact on market prices in the weeks before the
first publicly available information.
The company needed cash to implement its
expansion plan, and Blackstone not only had the
cash but also the expertise.
+6,4%

28. FINNOVATOR
Thank you!