from Ben Walsh:

How Blackstone made $8.5 billion from Hilton’s $6 billion increase in value

Ben Walsh
Dec 16, 2013 16:13 UTC

In July 2007, Blackstone took Hilton private for $26 billion. On Monday, Hilton IPO’d at $20 a share. Using the same measure to value the company as when Blackstone acquired it, Hilton’s enterprise value is now $32 billion. That’s $6 billion above Blackstone’s takeover price.So it’s a bit confusing to read that Blackstone has an made an $8.5 billion profit on its investment in Hilton.

Here’s how Blackstone, in Matt Levine’s words, “made more on Hilton, in dollar terms, than Hilton has made itself”.

Step 1: Acquire using some equity, and a lot more debt

Blackstone and its investors bought Hilton for $5.7 billion in equity. They also borrowed $13 billion and agreed to take on $7 billion of Hilton’s already existing debt. Equity plus debt minus cash held by the company, what’s called enterprise value, is how you get that $26 billion takeover cost.

This is the essence of the private equity model: buy a company with some equity, and a lot more debt; Blackstone owns the equity, and the lenders own the debt.

Step 2: Restructure, and survive some very bad years for the hotels business

Almost as soon as Blackstone bought Hilton, pretty much everything started going bad. First came the financial crisis, which arguably started one month after the acquisition. Then the hotel business tanked.

Hilton was making a lot less money. And because the hotel business was so bad, Hilton was simply a less valuable company. In 2009, Blackstone wrote down the value of its equity stake in Hilton by 70%.

Blackstone negotiated new terms with the company’s lenders. Levine explains this excellently: In 2010, Hilton paid $819 million to buy back $1.8 billion in debt and Hilton’s lenders agreed to convert $2.1 billion of the debt they were owed into equity. The debt buyback was funded by $819 million in new equity investment from Blackstone. Then, over the next two years, Hilton bought back another $1.7 billion of debt.

After Blackstone’s 70% write down of its equity stake, and using the 54% discount to full value used in restructuring the debt, we can estimate Hilton’s enterprise value in 2010 as around $12 billion. That’s made up of $2.6 billion in equity (5.4% owned by the lenders; 82% owned by Blackstone; the remainder by management and the company); $8.4 billion in debt at market value; around $800 million in cash.

At this point, the lenders were looking at substantial losses: they had locked in $1.8 billion in losses by selling debt below its initial value, and those sales pegged the value of their remaining loans at around half of what they had been. Blackstone’s losses were, on a percentage basis, potentially larger, but still totally unrealized. Instead of selling any of Hilton’s assets, they had invested more into the company.

In return, Blackstone got to reduce Hilton’s debt load. It also pushed out the maturity of the rest of the company’s debt by two years, decreasing its refinancing risk. In return, the lenders got some money back, and received 49 million equity shares, or just over 5% ownership in the company.

Step 3: IPO when things are better

Fast forward to September 2013, and debt markets are better than they were, so Hilton borrowed $10 billion to refinance its debt at lower interest rates. Hilton’s business is much stronger than it has been (revenue was up 39% in 2012), and the IPO market is relatively strong.

As a result, Hilton is now has an enterprise value of $32 billion. Blackstone’s equity stake is worth $15 billion, for which it paid $6.5 billion. And that’s where its $8.5 billion profit comes from.

Step 4: Wait for things to get even better (or worse)

Blackstone didn’t actually sell any of its shares in Hilton in the IPO. Perhaps this is because they think the company is worth more than $20 a share, or because investors tend to frown on the idea of buying shares that a private equity firm is selling (it still happens though), or some combination of the two. Regardless, Blackstone still owns 76% of Hilton’s shares. For every dollar Hilton’s shares move up, Blackstone makes another (unrealized!) $750 million. And for every dollar that Hilton’s shares drop, Blackstone loses the same.

Twitter economics

Ben Walsh
Oct 16, 2013 21:57 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to

As its mid-November IPO approaches, Twitter is losing money at an accelerating pace. The company’s amended filings show that last quarter it approximately doubled revenues to $168.6 million compared to a year ago, while its net loss more than tripled to $64.6 million. Fortune’s Stephen Gandel digs into the new numbers, and how Twitter changed the way it’s booking revenue:

Twitter derives most of its revenue from advertising. Most of the deals it strikes with advertisers are not fixed upfront… Twitter says that in most instances it only counts the revenue from a deal after the services have been delivered and the company knows how much it will get paid. But it says in some more complicated deals, it resorts to estimating what it might get paid.

Tax experts, Gandel reports, say that Twitter wouldn’t have changed its language on this topic without the SEC raising an eyebrow. Twitter is also looking to diversify its sources of revenue by mining its user data to help sell ads on other sites, the FT reports. (Twitter does not disclose how effective its own ads are). Selling ads across the web would put them in direct competition with Google’s Adsense, which dominates online ad buying. Facebook’s ad sales, in contrast, are limited to Facebook alone.

Losing money at such a growing rate, especially relative to revenue, diverges from models set by companies like Facebook, Zygna, or LinkedIn. Each of those companies, the WSJ points out, were each profitable before going public. The WSJ quotes analyst James Gellert characterizing Twitter as “more like a venture growth company”. Investors, Gellert says, are betting on Twitter’s “ability to achieve things in the future, rather than a historical demonstration of that ability”.

The company is spending aggressively, Vindu Goel and Michael de la Merced report, on research and development, along with employee stock and pay — paying, in other words, to create new products, and keep and acquire talent. Investors will hope those products will mean higher profits. “In the right hands,” David Carr writes, “Twitter can be a magical wealth-creation machine powered mostly by hot air”. — Ben Walsh

On to today’s links:

Right On
The government shutdown is ending. Here’s how - Neil Irwin
The moral of the debacle: Open-source everything – Paul Ford

The push for transparency in CEO pay has pushed compensation even higher - James Surowiecki

Long Reads
Why Americans are no longer moving, and how it’s holding the economy back – Timothy Noah

A jailhouse visit with “the Dread Pirate Roberts,” the alleged kingpin of Silk Road – San Francisco magazine

“Economists effectively put unfair economic outcomes in the same box as externalities like pollution” – Yves Smith

BofA’s Q3 in a nutshell: Fewer bad loans, but elsewhere things got mostly worse – Peter Rudegeair

S&P was minutes away from downgrading America to selective default – Newseek 
What Fitch has to say about the US debt rating (hint: it’s not good) - Fitch

JP Morgan
JP Morgan will pay $100 million to the CFTC in its last Whale settlement – Bloomberg

The gambler’s fallacy and market corrections – Carl Richards

Glenn Greenwald is heading to a media startup funded by Pierre Omidyar – Reuters
My next adventure in journalism – Pierre Omidyar

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