The International

Case Competition
At Harvard University

CASE BRIEF |
THE LEVERAGED BUYOUT OF
HILTON HOTELS
 Table of Contents
Team Welcome ............................................................................................................................................. 2

Case Overview & Background ..................................................................................................................... 4

Ethical Standards, Rules & Regulations ....................................................................................................... 4

Key Tasks & Deliverables ............................................................................................................................ 5

Investment Memo Presentation................................................................................................................. 5

Key Topics to Address .................................................................................................................................. 7

Brought to you by

HEBS
A Student Club at Harvard University 1
TEAM WELCOME LETTER

Competitors,

We are honored that you have chosen to compete in the 2016 International Case Competition at Harvard.
This competition has attracted top-notch talent from around the world. We created this competition with
the goal of providing a valuable opportunity for students to receive recognition. The competition is also
an excellent way for students to measure their skills against peers on a global level. HEBS has carefully
selected an HBS case that will offer a challenging and realistic private equity experience.

We are delighted to provide each student with the opportunity to present their business acumen to a panel
of illustrious judges and display their intelligence, creativity and passion. We are looking forward to
analyzing each case with careful precision and hope to gain financial insights from each and every one of
you.

Clayton M. Christensen, alumni Harvard University, HBS, educator and scholar, once said:

“Almost always, great new ideas don't emerge from within a single person or function, but at the
intersection of functions or people that have never met before”.

It is our goal and ambition that this International Case Competition becomes a recurring event each year,
providing an unparalleled experience for students around the world. Together, we can create and connect
the business minds of the future.

Welcome to the International Case Competition at Harvard, good luck, and we look forward to seeing you
in Cambridge this spring.

Best regards,

HEBS, Organizing Board

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CASE BRIEF |

THE LEVERAGED BUYOUT

OF HILTON HOTELS

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CASE OVERVIEW & BACKGROUND
Jon Gray, the head of Blackstone’s Real Estate Group, sourced one of the most ambitious and largest
transactions the firm had undertaken: the acquisition of Hilton Worldwide (formerly Hilton Hotels).

The complexity of the deal structure, the target transaction, and the level of capital commitment required
to execute the deal required various stakeholders to not only agree on the investment, but also to provide
additional value-added management and funding post-acquisition.

As such, the level of due diligence, financial engineering, and investment analysis required in order to
execute the transaction was considerable.

Refer to the Hilton Hotels: What a Long, Strange Trip It’s Been (A) and (B) and the Financial Statements
within the Case Brief. Outside research is allowed, assuming it adheres to the Ethical Standards outlined.

ETHICAL STANDARDS, RULES & REGULATIONS

1. All work submitted must represent the teams own words, ideas and work. Using public material is
allowed, but you are expected to cite the sources.

2. Once the case is released, interaction with professors, other students, industry professionals, or friends,
etc. regarding the case content or analysis is strictly prohibited.

3. Only the members of the team are authorized to read and use the case.

4. Before submitting your case, write team member names and your school name only on the front cover
of your Case Packet. This is to ensure that cases are graded without bias.

5. Submit the case to harvardccompetition@gmail.com in PDF format (Excel models and complementary
materials accepted) no later than Sunday, March 27th at 11:59 PM. Late submissions will not be accepted.

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KEY TASKS & DELIVERABLES
INVESTMENT MEMO PRESENTATION
As part of the investment process of Private Equity transactions, a thorough analysis and due diligence is
performed prior to the execution of a deal. As such, your team is tasked with creating an investment
memo illustrating the key areas to address in a typical transaction, as to provide your insights regarding
the Blackstone acquisition of Hilton.

The team must adhere to top quality standards and follow the below guidance:

 Investment Memo is to be submitted in Pdf format and supplementary models in excel

 The presentation should be 15 – 25 pages in length, including the cover page
 Include slide layouts, charts and diagrams normally used in the investment Banking, Private
Equity, or Management Consulting Industry
 Paste Special as ‘Enhanced Metafile’ when pasting model outputs into the presentation
 Format tables from model outputs accordingly (collapse rows & columns)
 Provide key assumptions for any model outputs included as part of the presentation

In addition, the presentation should cover the following components, at the minimum:

 Executive Summary
 Industry Analysis
o Overview of the Real Estate Industry & Hospitality Sector
o Analysis of Debt Capital Markets
o Industry Growth Drivers
 Investment Strategy & Summary
o Sources & Uses of Funds for the Hilton transaction
o Proposed Terms
o Investment Opportunity (LBO attributes)
o Exit Strategy & Rationale
 Business Analysis
o Overview of Company
o Business & Operating Model Analysis
o Liquidity and Debt Capacity
o Shareholder Ownership Structure

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 o Industry Peers & Key Direct Competitors (Benchmark Hilton’s Competitive Advantages)
 Financial Analysis & Valuation
o Historical Share Price Performance
o Valuation Overview- Illustrate a “Football Field” Valuation Analysis; which includes
low, base, and upside price scenarios across each valuation method
 Discussion on rationale for the 40% premium
o Financial Analysis
 Illustrate key financial ratios across Hilton and benchmark against its peers
(Growth. Efficiency, Profitability, Liquidity, Valuation Multiples, etc)
o Valuation Analysis – Price Hilton at the time of purchase assuming no capital injections
from Blackstone:
 Comparables Valuation & Analysis
 Precedents Valuation & Analysis
 DCF Valuation & Analysis
 Investment Risks
o Discussion of major risk areas
o Discussion of risk mitigation
 Investment Analysis – Team Assessment of the Transaction
o Was Blackstone’s acquisition of Hilton in 2007 a successful deployment of capital, or
was there another target within the hospitality sector that could have generated equal or
greater investment returns for Blackstone? Consider discussing the investment returns
and risks
 If so, please provide an analysis and a pitch for 1 – 2 alternative targets that could
have generated equal or greater returns (within the same time frame as
Blackstone’s acquisition of Hilton – 2007)
 Provide a brief overview of the valuation, investment opportunity, and
investment returns

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KEY TOPICS TO ADDRESS
As part of the investment memo presentation, the memo should address the following key topics:

1. What are typical features of LBO targets? Did Hilton meet the classic criteria?
a. Why is debt financing extensively used in LBOs?
b. Usually, LBOs are also MBOs. Why?
2. Provide an investment summary of Blackstone’s acquisition of Hilton
a. Draft the investment thesis of the Hilton acquisition
b. Include a Valuation analysis at the time just prior to transaction (2007)
c. Perform pro-forma analysis of Hilton just prior to going private (2007)
d. Present expected vs actual IRR at time of exit (include EV/EBITDA multiples and
EBITDA both at time of transaction and at exit)
3. Please provide a risk assessment of Blackstone’s investment in Hilton
a. Highlight the major investment risks
b. Provide a broad risk assessment of investing in the hotel/hospitality industry.
c. Given the Hilton LBO deal structure and after assessing Hilton’s debt capacity, detail risk
mitigation areas that Blackstone could deploy
4. Upon LBO, Blackstone offered a hefty 40% acquisition premium.
a. What are generally the key sources of value creation in LBOs?
b. In case of a public-to-private (PTP), which additional factors may add value?
c. In what aspects do private equity sponsors differ from corporate strategic buyers with
respect to their ability to create value in acquisitions?
d. How does the team expect to create adequate value in the Hilton LBO to justify the 40%
premium? Illustrate a pro-forma analysis indicating the sources of value and their effect
on EBITDA
e. How does the team justify the 40% premium? Consider building a DCF, comp, and
precedent transaction valuation to determine its intrinsic value vs the offer price
5. What was the primary reason to take the company private? Which alternative solutions might
Hilton have utilized to finance growth ambitions? Why were these not selected? Consider
discussing these in the exit strategy section
6. What were key reasons for the 2013 IPO? Would a trade sale have been an appealing substitute
exit route? And how about a secondary buyout? Consider discussing these in the exit strategy
section

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7. Blackstone did not exit its Hilton investment at IPO and even by the end of 2014, it was still
holding on to its Hilton stake. Why is this? Consider discussing these in the exit strategy section
8. The 2007 LBO of Hilton delivered to Blackstone a record gain exceeding $10b. Considering all
deal factors, did the transaction generate a satisfactory return? Consider discussing this analysis
in the Investment Analysis section

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The International
Case Competition
At Harvard University

Brought to you by

HEBS
A Student Club at Harvard University 9