For some reason Hilton is confusing everyone so I figured I'd write a servicey post explaining it. Here is the puzzle:

Ask me some time about the concept of "embedding tweets."
Ask me some time about the concept of "embedding tweets."

In October 2007, Blackstone bought Hilton. Blackstone paid about $19.4 billion for Hilton's stock. Hilton had about $6.5 billion of debt outstanding, some of which was refinanced and some of which wasn't, though it doesn't matter. That gave a total enterprise value of around $26 billion.

To come up with that $26 billion, Blackstone stumped up $5.7 billion of its own money and borrowed $20.6 billion of mortgage and mezzanine debt. This means that, the day after the acquisition closed, Hilton had an equity value of $5.7 billion and $20.6 billion of debt. That gave a total enterprise value of around $26 billion, which is what you'd expect: The enterprise value shouldn't change instantaneously because of the buyout.1

Then stuff happened. Among the stuff that happened was:

  • A global financial crisis. This doesn't enter into our servicey arithmetic directly but it's something to think about.
  • Hilton lost a lot of money, then made a little money. Overall, from Jan. 1, 2008, through Sept. 30, 2013, Hilton had a total operating loss of $716 million and a total net loss attributable to Blackstone of $5.1 billion.2
  • Hilton restructured some debt, buying back $1.8 billion of debt and converting $2.1 billion to preferred equity in 2010. The buyback of $1.8 billion of debt cost $819 million, which is a pretty good deal for Hilton, not so much for the lenders. That $819 million came in the form of a new equity injection from Blackstone.3
  • Hilton spent some money paying down debt: some $1.7 billion from 2010 to 2012.4
  • So roughly speaking Hilton spent $2.5 billion (and issued some stock) to reduce its debt by $5.5 billion.

If you follow all of that, Hilton started with $20.6 billion of debt, reduced it by $5.5 billion and should now have about $15 billion of debt. As in fact it does.5 And Blackstone put in $5.7 billion day one and added another $819 million in 2010, for a total equity investment of around $6.5 billion.

Today Hilton went public at $20 a share. It's got 984.6 million shares outstanding, of which 750.6 million are owned by Blackstone, giving it a total equity value at the initial public offering price of $19.7 billion, of which Blackstone's stake is worth $15 billion.6 So Blackstone made $15 billion minus its $6.5 billion initial investment equals $8.5 billion. On paper, whatever; Blackstone isn't selling in the offering.

There's about $724 million of cash on the balance sheet, plus another $1.3 billion from the offering; $19.7 billion of equity plus $15 billion of debt minus $2 billion of cash gives you an enterprise value of around $33 billion. So the enterprise value grew by about $7 billion since the buyout, and Blackstone got more than all of it.

That doesn't necessarily mean that the lenders got hosed -- after all some of their debt was paid down over time -- but it sure suggests that they might have. Using really crude aggregate numbers:

  • Lenders put up $20.6 billion.
  • They've got $15 billion of debt outstanding today.
  • They've gotten paid back around $2.5 billion before the IPO.
  • They also got some stock.
  • They sold 49 million shares, for around $974 million, in the IPO (and will clear another $338 million if the greenshoe is exercised, as seems likely now, for a total of $1.3 billion).7
  • They've still got around 49 million shares, worth around $990 million (plus that $338 million if the greenshoe is not exercised).

So in aggregate the lenders have gotten about $15 billion in debt, $3.8 billion in cash (assuming greenshoe exercise), and $1 billion in stock for their investment, or $19.8 billion total on an investment of $20.6 billion. Plus interest, really, but still a bit of a loss of principal.

So the net scorecard is roughly speaking:

  • Hilton's value is up by about $7 billion.
  • Blackstone's share is up by about $8.5 billion.
  • The lenders' share is down by about $0.8 billion.

There's some rounding error in there, but you get the idea.

It would be silly to get mad at Blackstone over this. They did a deal just before a financial crisis, which you can't blame them for really. Everyone was doing deals just before the crisis. That's practically the definition of a financial crisis: It's the thing before which everyone was doing deals. After the crisis, things got bad, and Blackstone restructured its debt. It drove a hard arms'-length bargain, took on more equity risk and shared some of that equity risk (and upside) with its lenders. That more or less worked out. The lenders realized more than all of their losses in 2010 -- selling $1.8 billion of debt for $819 million -- because they were wimps; Blackstone doubled down and made money.

Still it's a nice counterpoint to my glib guess this morning that private equity mostly makes money by, like, improving cleanliness. The financial engineering here is nothing unusual -- buy a company, lever it up a lot, negotiate hard with lenders in distress, hold through the cycle, sell at a profit -- but it did contribute a lot to Blackstone's returns here. And it's why Blackstone has made more on Hilton, in dollar terms, than Hilton has made itself.

1 I mean, Blackstone borrowed to pay fees and stuff, which I guess becomes part of enterprise value. It is perhaps best not to think too hard about that.

2 Data on page 60 of the S-1. Arithmetic here.

3 See page F-26 of the S-1. Note also the "equity contribution from Parent" in the cash flow statement on page F-6; that's Blackstone's $819 million contribution to the restructuring.

4 Data on page F-6 of the S-1. I don't have 2008-2009 paydown information but the arithmetic works, roughly, if you assume it was zero-ish.

5 See pages 96-97 of the S-1, which also has some detail on pre-IPO restructuring that doesn't concern us much.

6 The stock is up a bit this morning -- I see mid-$21s -- but let's ignore that.

7 See page 176 of the S-1. Note that some of the lenders cashing out are, um, Blackstone:

The members of Hilton Global Holdings LLC that have elected to receive a cash payment are former lenders to us (or their transferees) who received their interests in Hilton Global Holdings LLC as part of our 2010 debt restructuring and include a debt-focused investment vehicle now managed by Blackstone as a result of Blackstone’s 2012 acquisition of Capital Trust, Inc.’s investment management and special servicing business and related fund co-investments that has elected to receive cash in lieu of shares representing represents less than 1% of our common stock and HHotels Mezz Debt Private Limited. No private equity or real estate opportunity fund or co-investment vehicle sponsored or managed by Blackstone has elected to receive any cash in lieu of shares of our common stock.

Also note that Hilton is charging those investors a fee for cashing out: They're only getting 95 percent of the proceeds. I'm ignoring that in my math but, man, insult to injury.