Analysis: After mega-LBO boom, a massive private equity cleanup

Wed Aug 28, 2013 3:31am EDT
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By Greg Roumeliotis

NEW YORK (Reuters) - According to Blackstone Group LP's (BX.N: Quote) books, the private equity firm's investment in Hilton Worldwide Inc was worth 50 percent more this year than when it took the international hotel chain private in 2007.

While that might not seem like much compared to private equity's historical record of doubling or tripling its investments, it is a remarkable turnaround for a $26.7 billion deal that has come to epitomize the leveraged buyout boom and bust of the past decade.

Hilton is one of many cleanup acts that have been quietly going on in the world of private equity, as the industry atones for a debt binge in the years before the financial crisis.

Many of the largest buyouts from 2005 to 2008 were based on revenue and profit expectations that proved too optimistic when the recession hit. Companies such as casino operator Caesars Entertainment Corp (CZR.O: Quote) and Texas utility Energy Future Holdings were saddled with huge piles of debt and had difficulty meeting interest payments when business declined.

Just months after Blackstone closed the Hilton deal, the financial crisis forced the firm to dock the value of its investment by half, according to fund documents seen by Reuters.

In 2010, Blackstone persuaded Hilton creditors to agree to a restructuring that cut the company's total debt by nearly $4 billion and pushed back debt maturities by two years to 2015. The restructuring was notable for both its scale and impact: Hilton was allowed to keep more of its cash flow, which is projected to be up 58 percent this year compared to 2009.

With the U.S. economy growing again, Blackstone is now looking to refinance another $12 billion of Hilton debt and plans to take the company public next year.

Blackstone's final returns on the deal are not yet known. On paper, the firm valued Hilton at around 1.5 times its investment, a person familiar with the matter said, citing figures as of the end of March. Blackstone declined to comment.   Continued...

An exterior shot of the Hilton Midtown in New York June 7, 2013. REUTERS/Andrew Kelly