Private Equity Assessment
Write an essay/case write-up on the Hilton Hotels LBO. While you are free to zoom-in any issue of particular interest to you and you will be rewarded for any good insight irrespective of it being directly related to one of the questions asked, the following set of questions should be tackled and provide you with a guideline for discussion.
Question 1: Should the board have accepted the per share price of $47.50 offered by Blackstone? Why or why not? If not, what should the board have done?
Question 2a: Does the 2001 crisis teach a lesson relevant to Blackstone when considering such an LBO? Why or why not?
Question 2b: Run the model assuming that another 2001-2002 downturn occurs in 2008-2009. What would Blacktone return be under the different capital structures shown in the exhibits?
Question 3: How does the size of Hilton, its competitors and PE/RE funds inform Blackstone about potential exit route four/five years down the road?
Question 4: Is the 2007 booming market the right moment for Blackstone to yet again invest in a hotel business?
Question 5: Why would Hilton focus on growing franchise and management business instead of purchasing hotels for expansion, as it did in 1990's?
Question 6: Discuss the pros and cons of Hilton debt restructuring orchestrated by Blackstone for its investors? What about for debt-holders?
Question 7: How much would have been the capital gain of Blackstone assuming the same exit multiple as at entry and an EBITDA growing at the same rate as its competitors? What do you conclude regarding the source of the capital gains in this transaction?
Question 8: How much is Blacktone's capital gain on December 11, 2013 and right now? What is the Ebitda/TEV ratio on those days? Do they differ from those at entry? Why or why not? What are the risks faced by Blackstone and its investors post-IPO?
Question 9: Loans to PE/RE-sponsored companies have an interest rate that is floating (LIBOR plus a fixed margin). Banks would usually require companies to hedge this interest rate risk. Why do you think banks require this? Do you think it was the case for the Hilton transaction?
Question 10: The Canadian model of investing is getting traction in the illiquid investment space among institutional investors. This model dictates that a $100 equity investment in an LBO should contemporaneously trigger a $130 sale of a similar publicly listed stock and a $30 purchase of government bonds. The idea is to isolate the alpha of the PE transaction, maintain portfolio diversification, and hedge away market risk. What trading would a Canadian-model adopter do in the case of the Hilton LBO and what would her total return be at the time of the Hilton IPO? Is this an effective risk management practice? Comment and debate on what this approach does under different scenarios.
The essay should be no more than 3000 words long (excluding bibliography and appendices).
References-
Chapter 1: The Sources of Capital
Chapter 2: Company Valuation
Chapter 3: For the Love of Debt
Chapter 4: Value Creation
Chapter 5: Play The Leverage Game
Chapter 6: Dirty PE?
Chapter 7 - Allocating Capital to PE funds
Chapter 8: Happy Fees
Attachment:- Assignment Files.rar