Stephen Schwarzman is enjoying his stay at the Hilton.
The billionaire head of Blackstone Group is set to more than double his 2007 investment in the hotel chain — thanks in large part to a shrewd, deeply discounted purchase in 2010 of Hilton debt.
Blackstone bought $2 billion of debt at 40 cents on the dollar, or $800 million. It is now trading near par, giving the investor a 150 percent gain.
That, combined with a 23 percent rise in Hilton Worldwide equity over six years, will help turn Blackstone’s $6.4 billion investment into a $15 billion stake when it goes public on Dec. 12, a source close to the situation said.
The company in the expected $2.4 billion IPO will also be paying off another $1.25 billion in debt. Blackstone will not be selling any of its stake.
Hilton generates roughly $400 million in annual free cash flow, after capital expenditures, allowing it to gradually reduce its debt balance.
Private-equity firms in leveraged buyouts put down roughly 30 percent of the purchase price and have the companies they acquire borrow the rest. The value of their equity rises with each dollar the company pays down in debt assuming the value of the company remains the same, or rises.
Hilton after its IPO will have a roughly $20 billion market cap, and be carrying $12 billion in debt giving it a $32 billion value.
Schwarzman bought Hilton for a 13 times pre-tax cash-flow multiple in the 2007 $26 billion buyout, and the IPO is at roughly the same multiple, so the more modest 23 percent increase in Hilton’s value comes from increasing earnings.
Blackstone’s Hilton profit will also be enhanced by having its advisory arm help underwrite the IPO, according to a Monday regulatory filing.
Hilton, in the filing, said a Blackstone conflict will not stop it from collecting underwriting fees.