Blackstone's Hilton Joins Ranks of Biggest Deal Paydays

Bloomberg

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Hilton Worldwide Holdings Inc., once seen as a black mark on Blackstone Group LP's record in real estate, is poised to generate one of the two biggest private-equity profits of all time.

Blackstone stands to make a paper profit of more than $8 billion in the McLean, Virginia-based hotel operator's initial public offering, scheduled for Wednesday. That would be second only to the $10.1 billion of gains that Apollo Global Management LLC has had from its 2008 investment in chemicals producer LyondellBasell Industries NV, according to data compiled by Bloomberg. Hilton would become No. 1 if the shares rise more than $1 above the high end of the proposed price range.

The turnaround of the world's largest hotel chain marks a triumph for New York-based Blackstone, which bought Hilton at the end of the 2007 buyout boom only to see property values and hotel occupancies plunge during the credit crisis that ensued. The rebound reflects Hilton's strides under chief executive officer Christopher Nassetta in increasing revenue and profit, as well as a recovery in the lodging and capital markets.

"With Hilton, they demonstrated the best attributes of what private equity advertises itself to be, which is finding and improving companies with an intensive dose of new and better management," said Mike Kirby, chairman of Green Street Advisors Inc., a Newport Beach, Calif.-based property-research firm. "The commercial real estate market has had an amazing recovery from its near-death experience, and that clearly helped."

Blackstone Stake

Hilton and existing shareholders are offering 112.8 million shares in the IPO for $18 to $21 each. The sale was more than five times oversubscribed as of Tuesday afternoon, two people with knowledge of the matter said.

Blackstone, the world's largest manager of alternative assets such as private-equity funds and real estate, isn't selling in the IPO and will hold about 750.6 million shares after the offering, according to a regulatory filing. That represents a 76.2 percent stake valued at $14.6 billion at the middle of the expected price range.

Based on the roughly $6.5 billion that Blackstone and its investors have put into Hilton, the valuation would give the firm an unrealized gain of $8.1 billion. If Hilton prices at $21, Blackstone's shares would be worth $15.8 billion, for a paper profit of about $9.3 billion.

In nominal terms, the Hilton profit would surpass the $7 billion that Henry Kravis's KKR & Co. reaped from the 1986 buyout of supermarket chain Safeway Inc., and a similar return a group led by financier J. Christopher Flowers made from the 2000 takeover of the predecessor to Tokyo-based Shinsei Bank Ltd.

Apollo Deal

Apollo's gain in Houston-based LyondellBasell currently holds the record for a private-equity deal. The New York-based firm amassed its interest through the purchase of distressed debt rather than a traditional buyout. It accumulated the stake in 2008 and 2009 and owned as much as 30 percent of LyondellBasell.

Apollo sold almost all of its shares beginning in September 2012. As of Nov. 1, Apollo owned 14.72 million shares of LyondellBasell, a 2.7 percent stake with a current market value of $1.1 billion.

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