Blackstone Group's Biggest LBO Keeps the Mini-bar Stocked

On Oct. 12, 1949, Conrad Hilton, who founded the company now known as Hilton Worldwide Holdings Inc. (HLT) , realized a lifelong goal: the acquisition of the Waldorf-Astoria's management rights. It would not be until 1972, only seven years before Conrad's death, that his company would assume total control of the Waldorf, which, the billionaire once wrote on a photograph, is "The Greatest of Them All."

Nearly 65 years to the day, Hilton's company, long beyond his and his family's control, sold off the Waldorf in a $1.95 billion deal with China's Anbang Insurance Group Co. Ltd., retaining operational duties for the next century in what would come to be called the most expensive hotel deal in history. The management of Hilton's legacy, right down to its crown jewel, may be the crowning achievement of another outspoken billionaire, Steven Schwarzman, Blackstone Group LP's CEO.

The company said its mega-payday wouldn't be used to lavish cash on the sponsor that took it public, but instead to acquire new properties — specifically "in one or more transactions as part of a like-kind exchange under Internal Revenue Code Section 1031," it revealed in its announcement.

Blackstone (BX) didn't take a nickel from Hilton's late 2013 initial public offering; the paper value of its 76.4% stake in the company was worth nearly $20 billion after pricing just past the midpoint of its expected range nearly a year ago. It was the biggest hotel IPO in history.

The sponsor also elected to not immediately offload shares after the lockup expired. But, more recently, it has: Blackstone priced 90 million shares of Hilton stock at $25 each on Nov. 4, and set aside 13.5 million more shares for underwriters, in a secondary offering — Blackstone's second — that will net the private equity firm nearly $2.6 billion if totally sold.

Blackstone's first secondary offering, which it did in late June, sold all 103.5 million shares — the same size as the most recent sale of Hilton stock. In June, the shares priced at $22.50, and Hilton has dealt out nearly $4.9 billion in cash to the sponsor that took it private in 2007, in a deal that valued it at nearly $25 billion.

Since Hilton's public market debut, Blackstone has pared its stake to 55% from about 76.4%, leaving it with a claim to more than $12 billion in value of a company that, at the end of trading Thursday, was worth roughly $24.1 billion.

Between the nearly $6 billion in cash and almost $20 billion more in debt Blackstone put onto the investment, it seems certain the LBO shop's signature transaction will prove successful — a point that other big-name PE firms, like TPG Capital LP and KKR & Co. LP (KKR) may not be able to claim.

The success of Blackstone's investment is not just crucial to the success of the general partners in the fund, or other executives, like Jonathan Gray, the private equity firm's head of real estate who also holds more than $1.3 million worth of Hilton stock: since Hilton represents Blackstone's biggest equity check to date, it is especially important to its limited partners, like the Public Employees' Retirement Association of Colorado.

The state pension lists returns for Blackstone funds online, and according to its most recent set of statistics, with roughly one-quarter of capital returned from the $21.7 billion Blackstone Capital Partners V, the 2006 vehicle responsible for the Hilton acquisition, the fund has only generated 5.69% in IRR, considered meager as an industry benchmark. According to the same records, Blackstone's second, third and sixth funds are all on pace to outperform the one that will be remembered for the PE firm's biggest deal.

That said, fund five still has three-quarters of its outstanding capital left to return, so there is time on the proverbial clock.

For the foreseeable future, Blackstone, and its limited partners, will continue to hold a stake in Hilton — that's according to Schwarzman, who said as much about the company on a recent earnings call. The next stake sale, if it is identical to other Blackstone secondary stock sales, will reduce its position to a minority stake, albeit a sizeable one. Next, the firm could do a combination of distributions to limited partners, as well as stake sales, one LP suggested.

It isn't likely Blackstone executives will call its 2006 fund, or the returns from the Hilton deal, "The Greatest of Them All," as Conrad Hilton did the crown jewel his company cast aside, in part, to satisfy its obligations as a public company — Hilton will use the cash to add more high-end hotels.

But, between the company's successful IPO, its upward trajectory of more than 20% since its pricing nearly a year ago, and the fact Hilton has come out ahead of estimates three of the four quarters it has been back on public markets, Schwarzman and his fellow GPs are likely breathing easier as they line up what sources say could be a new fund of $16 billion, or greater.

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