Electronic copy available at: This note was prepared by Ludovic Phalippou and Dawoon Chung (MFE ’13) solely as the basis for class discussion. Ludovic Phalippouis Associate Professor of Finance at the Saïd Business School, fellow at Queen’s college and Oxford-Man institute, all at University ofOxford. We are grateful to Tim Jenkinson, Peter Morris for providing useful comments.© University of Oxford 2014The University of Oxford makes no warranties or representations of any kind concerning the accuracy or suitability of the informationcontained herein for any purpose. All such information is provided “as is” and with specific disclaimer of any warranties of merchantability,fitness for purpose, title and/or non-infringement. The views expressed are those of the contributors and are not necessarily endorsedby the University of Oxford.Saïd Business School casesHilton Hotels: Real Estate Private EquityLudovic PhalippouAbstractOn December 13, 2013, two days after its IPO, Hilton hotels traded above $22 a share. This meant thatthe 2007 take-private transaction of Blackstone had produced the largest gain ever in private equity atabout $10 billion. In addition, Hilton had become the largest hotel group in the world by number ofrooms up from 4thposition 6 years previously, when Blackstone bought the company. How can suchsuccess occur with a cyclical business during the worst financial crisis since 1929-1933? Somebodydefinitely deserves a big box of chocolates; but who? The answer is surprising and offers a detailedinsight into the life-cycle of real estate private equity transactions.APRIL 5, 2014INSPECTION COPY
Electronic copy available at: Hilton hotels: Real estate private equityLudovic Phalippou21. Introduction“Hilton Worldwide Holdings Inc., once seen as a black mark on Blackstone’s record in real estate, ispoised to generate one of the two biggest private-equity profits of all time.”“Blackstone has a paper profit of $8.5 billion in the McLean, Virginia-based hotel operator’s initialpublic offering today. That’s second only to the $10.1 billion of gains that Apollo Global ManagementLLC (APO) has had from its 2008 investment in chemicals producer LyondellBasell Industries NV(LYB) … Hilton would become No. 1 if the shares rise more than $2 above its IPO price.”1On June 28, 2007, Hilton’s board convened a special telephonic meeting, together with theCompany’s management and legal and financial advisors, to review Blackstone’s offer to acquirethe Company for $47.50 a share. This represented a premium of approximately 40% to thecompany’s stock price. During a lengthy discussion, the board members considered, among otherthings, risks to the Company’s ability to sustain the growth rates given the cyclicality of thelodging industry. Board members also looked at Blackstone’s experience. As it turns out, lodgingcompanies were a specialty of Blackstone, which had acquired over the four preceding yearsalone:ExtendedStayAmerica,
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