Questioning Blackstone's Hilton Buyout

Includes: BX, HLT-OLD
by: Larry Gendler

Over the last several years, private equity deals were reasonably well thought-out and done at multiples that reflected some discipline.

But today I am beginning to wonder after Blackstone's (NYSE:BX) remarkable bid for Hilton (HLT-OLD), which involves a 32% premium over an already strong stock price.

The hotel business is notoriously cyclical. During the last recession, and in the wake of September 11th, Hilton's stock languished in the single-digits. Hotel industry fundamentals are robust right now, but we are very far along in the industry's upswing.

Blackstone is paying about 30 times earnings, and 15 times Ebitda (2008 estimates) - far above 10-year historical median valuations. Presumably, they will be leveraging up Hilton's already lousy balance sheet. I might also point out that, over the years, Hilton's return on invested capital has been decidedly mediocre.

Let's see... paying up -- and leveraging -- for a highly cyclical business, five years into an industry upturn. Doesn't sound like a great trade to me.

Maybe there are some terrific synergies with Blackstone's already vast hotel holdings. And maybe there are some valuable hidden assets on Hilton's balance sheet. I hope so for Blackstone's sake.

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