As July 4, 2007, dawned on the Chesapeake Bay, Christopher Nassetta, then the chairman and chief executive of Host Hotels & Resorts in Bethesda, was preparing to take his daughters fishing.
He pulled the fishing poles together and grabbed his BlackBerry from his nearby Lexus SUV. His e-mail inbox, usually calm on holidays like the Fourth, was full.
“I’m thinking something bad happened,” said Nassetta, then 44.
Private equity giant Blackstone Group the night before had closed one of the blockbuster deals of all time: the $26 billion purchase of Hilton International.
Nassetta scrolled through the e-mails describing the deal. He strolled, absorbing the implications, toward the family dock, the Boston Whaler skiff bobbing in the water, his daughters anxious to fish.
“Are you all right?” asked his father-in-law. “You look distracted.’”
Nassetta told him about the Hilton sale.
“I have this sneaking suspicion that this could change our lives,” Nassetta said aloud.
A few hundred miles north, the man who had engineered the purchase of Hilton for Blackstone, Jonathan Gray, was thinking the same thing.
He already had his eye on Nassetta.
Blackstone’s purchase of Hilton is a defining moment of the private equity era. The story of the purchase and the years that followed is a Wall Street opera involving high stakes finance, layoffs, accusations of corporate spying and the resurrection of an iconic American brand.
Blackstone’s $26 billion purchase on Fourth of July eve came at the very peak of what is generally considered the heyday of private equity. The economy had not yet gone over the cliff. The stock market was booming. Cash was plentiful. Takeover prices were soaring.
Carlyle Group bought Hertz for $15 billion. Kohlberg Kravis Roberts & Co. bought First Data for $31 billion. Equity Office Properties sold for $40 billion. KKR and partner Texas Pacific Group bought TXU Energy for $45 billion.
But Hilton stood out.
“One of the things important in investing is vintage, and Hilton was a bad vintage,” said one experienced private equity investor, who requested anonymity because this person does business with many players in the Hilton world. “Blackstone bought at a very frothy time of the market.”
The Hilton sale would eventually be seen as private equity’s “last train out of Dodge,” said Nassetta, 51, looking back.
It was Gray’s baby.
As global head of real estate for the Blackstone Group, Gray — known for his stay-the-course investment convictions — was in the running to succeed Blackstone co-founder and chairman, Stephen Schwarzman. Gray had built the real estate group into Blackstone’s biggest and most profitable division, making himself enormously wealthy in the process.
He had convinced his investment committee to put $5.5 billion in cash — a huge amount, even for Blackstone — into the Hilton deal.
The hospitality giant was ripe for a makeover. By 2007, Hilton was an also-ran in the hotel industry. It was profitable, but the company was a shadow of what it had been in its heyday of the 1950s and 1960s, when its brand was as recognizable as Coca-Cola or Chevrolet. The company had become an industry byword for poor, Balkanized management.
“Hilton was a little bit sleepy,” said a former hotel analyst who requested anonymity because he does business with Hilton. “The executives didn’t work all that hard. There are numerous stories about these guys not taking that company to the next level.”
Gray saw that.
“Hilton had a full family of brands, but outside the U.S. it was Hilton and a handful of Conrads,” Gray said. “There was enormous growth potential out there. We thought, ‘Wouldn’t it be great if we could give them a passport to travel around the globe.’”
The world was getting richer. For instance, China’s middle class was exploding, demanding goods and services. Hotel rooms weren’t keeping pace with demand. People wanted brand names.
Expanding Hilton globally also appeared to be a reasonably safe bet. Marriott International and Starwood were already benefiting from essentially the same strategy. It meant managing rather than owning hotels, which could produce huge profit margins because someone else would shell out for the real estate.
Hilton would run the business for a negotiated price. But the model only worked if the company could keep a close rein on brand standards, so customers never had a sloppy experience.
“It’s no different than other franchising platforms, like Dunkin’ Donuts and Domino’s Pizza,” Credit-Suisse analyst Joel Simkins said. “We call this asset-light because you use other people’s money. Wall Street likes the high return on capital.”
Hilton also owned some of the most prestigious names and locations in the business: the Waldorf-Astoria in New York, the London Park Lane, Sydney, Hawaiian Village. All were ripe for exploiting.
Gray threw Blackstone’s $5.5 billion in cash on the table — the biggest private equity check ever written — then borrowed another $20.5 billion from his bankers. The price was high, but not ridiculous considering how other deals — and other hotel chains — were valued at the time.
In the weeks after the Fourth of July holiday had passed, the economy began to sputter — and the Hilton deal, at least in the eyes of observers, began to curdle.
“Within 48 hours, it was in [trouble],” said Terry Golden, former chairman and chief executive of Host and Nassetta’s one-time business partner and mentor. “It was really obvious to Blackstone that they needed to get a real superstar to run it.”
Weeks later, Gray and Nassetta were eating salads in a booth at the Occidental Grill, part of the Willard Hotel and office complex in downtown Washington and near the White House.
Nassetta knew the restaurant well. It was one of the pieces upon which he built his reputation as a closer. A guy who could get it done.
As a 20-something out of the University of Virginia, he had raised the $4 million to build the restaurant and helped oversee the resurrection of the Willard for the Oliver Carr Co., then one of Washington’s premier developers. The hotel was part of Washington history, where detective Alan Pinkerton smuggled President-elect Abraham Lincoln to avert a pre-inauguration assassination attempt.
That late-summer day in 2007, Gray was pitching Nassetta on running Hilton. Both had done business together when Nassetta was at Host, and Gray needed a captain for his bet-it-all deal.
“This was a hugely important decision, and you wanted somebody you like and trust, and his capabilities as a businessman were unmatched,” Gray said. “That’s why I wanted him in the seat.”
Gray and Nassetta got along as friends, as well, and frequently traded stories about their families. Gray has four daughters and Nassetta has six. They just liked each other.
“With all his success in business, he always has stayed a really good guy,” Gray said.
Aside from the challenge, Nassetta stood to become immensely wealthy. The stock and compensation would run into the tens of millions. But he balked.
“I said, ‘Jon, I’m really not interested,’” recalled Nassetta, who was happy at Host. “I’m really committed here. I’ll listen, but I want you to know I’m not predisposed to do it.”
Just the idea of moving his wife and six daughters to Beverly Hills, where Hilton was headquartered at the time, was a potential deal-killer to Nassetta, an Arlington guy who wanted to stay close to his family and friends.
But Gray laid out his plan. Nassetta heard him out. The plan appealed to Nassetta’s innate competitive nature.
“I had checked all the boxes and then some on the things I had wanted to accomplish,” Nassetta recalled. “So when I really started listening to Jon ... I realized I was ready for the next challenge.”
In the finance and real estate business, Nassetta was known as a restructuring expert; he fixes broken companies. He did it at Oliver Carr, Antonelli Group and at Host. As Gray knew, Nassetta was a numbers guy. He had people skills.
With his boyish mop of salt-and-pepper hair, Nassetta was not afraid to mix it up with journalists and hotel industry analysts, which is what Hilton would sorely need.
Analysts who covered him at Host remember Nassetta as a disarming spokesman, given to reciting business platitudes and never veering from the message.
“If you asked him if the sky was blue today, he would say, ‘Yes. I had eggs for breakfast.’ Whatever is on his mind, he will make sure that message gets across,” said one former analyst.
For the first 90 days after taking over in October 2007, Nassetta toured the world of Hilton, visiting hotels, talking to managers, bellhops, cooks. He fielded questions at hotel town hall meetings. He wandered corporate offices. Big groups. Small groups.
“As we got into it, we found all these things,” Nassetta said. “People were living in ivory towers. Some in Beverly Hills. We didn’t have the connectivity. The hotels were saying, ‘Leave us alone. I don’t like you corporate types.’ We had become siloed.”
Even the posters listing corporate guidelines differed from hotel to hotel, driving Nassetta — who puts great stock in business culture — crazy.
“There was certainly a lot of low-hanging fruit from an operations perspective,” Simkins said.
Each geographic region was a self-contained business, independent of the Beverly Hills headquarters. The back-office duplication presented mind-boggling savings opportunities. Each region, for example, had its own information technology, human resources, finance and legal staffs. There was little integration.
Even at the Beverly Hills home office, sales and marketing staffs for the Hilton Honors and Family of Brands occupied different floors.
Nassetta likened the dysfunction to watching rowers when he was a student at UVA.
“You see those guys and they look so good when all the oars are going the same way. You get the right cadence, it’s amazing how fast that sucker moves. And that’s the story of Hilton Worldwide. All the oars were just slapping around.”
More importantly, the California headquarters was mired in lethargy.
“We were complacent. There was no culture of innovation. It was more a culture of do it at a relatively slow pace and do it the way we’ve always done it,” Nassetta said. “It just wasn’t organized in the right way.”
Nassetta became a personnel fanatic, rebuilding his team and getting involved with every management hire. He brought in Kevin Jacobs, who had worked for him at Host, to coordinate the transformation as chief financial officer. Most managers in the executive suite did not last long. Of the top 100, maybe a third are still there.
Nassetta started the “immersion,” which requires every corporate manager to spend three days a year on the front lines — cook, housekeeping, front desk — to get a feel for the customers.
A single companywide system for employee performance evaluations was put in place. Nassetta reduced the list of do’s and don’ts to run the flagship Hilton Hotels brand from more than 3,000 to around 300. Costs were cut — from the corporate headquarters to hotels.
“We were able to save a ton of money without affecting performance one bit,” said Jacobs, the CFO. Hilton’s timeshare unit, which was once siloed as essentially a stand-alone business, was fully integrated into the company with its head reporting to Nassetta, and in the following six years, timeshare revenue leaped 44 percent
The company did little things, such as launching multilingual Web sites. It created mobile applications. It spent millions on technology to upgrade the Hilton Honors program, making it easier for customers to spend the points they had accumulated during their stays.
“There was a lot of what he did that was simply listening to the customer,” Simkins said. “I remember, prior to Chris’s arrival, there were many restrictions and blackout dates on Hilton Honors. It was like the airline industry, making it hard for consumers to use their points. By loosening some of those restrictions and giving customers what they want, you automatically get market share and pick up more customers.”
Nassetta believed that California, Beverly Hills in particular, was the wrong place for Hilton. First of all, the headquarters was a few blocks off Rodeo Drive, the poodle-and-purse shopping district whose vibe was more ultra-spend than ultra-work. There were simple logistical problems such as getting to the airport, as well as traffic and time zone issues. There were the problems with housing costs, with Southern California one of the most expensive housing markets in the country.
So when Nassetta looked around at other alternatives, including Dallas, Atlanta and Chicago, Washington — which is the epicenter for hospitality infrastructure with Marriott, Host and Choice hotels chains all located here—won out.
“Moving the company to lovely McLean, which is nice but it’s not Beverly Hills, was definitely a major sea change that was going to attract a different caliber of people,” Simkins said
Nassetta called a meeting in the company cafeteria, named the Mobley for Hilton’s first hotel in 1919, that January morning in 2009, and stood before hundreds of employees to give them the news that the company was leaving, and most would not be following. Out of 500 or so employees at the headquarters, only 100 would follow to Northern Virginia.
“I was committed to look them in the eye, tell them what I’m doing, give them the reasons why and answer questions for as long as they wanted.”
Having made the move to Washington, Nassetta lasered in on expanding the company to catch Marriott.
He grew brands outside of the United States beyond the upscale core three of Hilton, Conrad and Hilton Grand Vacations, so that any potential customer in the world at any price point could find and afford a Hilton.
To accommodate the middle-class and business travelers in Asia and Europe, he exported mid-market brands such as Hilton Garden Inn and Hampton Inn.
Still, there were troublesome issues, the foremost of which was the $20.5 billion debt. Though Nassetta kept the company cash flow positive, the debt was so large that a severe economic disruption, either to the hotel business or the economy as a whole, could have caused Hilton to start selling off parts of the company.
“I slept with an eye open,” he admits.
As the economy soured following the demise of Lehman Bros. in October 2008, the cyclical hospitality industry was headed into a steep decline. Same hotel sales went down by 20 percent and profits by 40 percent.
“Investors were concerned we had made a bad investment and you got to read the same thing in the newspaper on a regular basis,” Gray said.
He and Nassetta began to have discussions about asking the banks to give them a break by restructuring the company’s massive debt. It meant asking the banks to forgive some of the massive debt.
The stakes were huge. All the 2007 loans were heading toward a maturity date in 2013. It was years off, but a forced reckoning could kill Hilton’s business. At the very least, it would cause the company, in Nassetta’s words, “to start breaking furniture” to pay its loans.
“We needed to de-risk,” Nassetta said simply.
The low point came in April 2009, when he was in Washington on business, alone, pacing across the floor of the vacant Cape Cod home he still owned in Arlington, near where he had grown up and where his parents, brothers and sisters still lived.
He was talking with Gray on his cellphone, and it was the same day that Starwood Hotels had filed suit against Hilton for stealing corporate secrets. Hilton had hired some Starwood executives, and they had allegedly brought with them key corporate documents.
“Jon and I said to each other, ‘It can’t get any worse.’ We both felt like we were on an island and at the top of the palm tree with the sharks swimming below in the water.”
As the economy spiralled downward in 2009, Hilton had lost 70 percent of its value.
“I vividly remember being on the phone that night, saying to Chris, ‘I promise you it cannot get worse than this. We will look back on this moment and say, ‘Remember when this was the absolute bottom?’”
The banks would have to be squeezed.
“It was really important for the business, psychologically,” to restructure, Gray said. “At the time, there were a lot of concerns about leverage. Third-party hotel owners of potential Hilton properties and employees were apprehensive. Getting this done was valuable, because it changed the perception.”
Nassetta sat by himself at the Park Lane Hilton in London in August 2009, with the bankers and Blackstone on the line.
“I went through the rationale. I said we’re all in this together and, if we don’t take steps to ensure our future, the risks of material damage to the business are significant.”
There was a dead silence at the end of the talk.
For the next eight months, Hilton and Blackstone negotiated with the banks who held the $20 billion in debt. In April 2010, Blackstone and Hilton reached a deal extending the loans to 2015. The new terms resulted in Blackstone buying back $2 billion worth of debt from the consortium of banks, for around $800 million, essentially forcing the banks to take a $1.2 billion loss.
The banks took another $2 billion off the debt and converted it into Hilton preferred stock, which the banks could sell or keep should the company go public. The deal also required Blackstone to double down and show its faith in Hilton by putting up another $800 million in cash on top of the billions it already invested.
“People basically were saying [the Hilton deal] was a huge disaster for Blackstone,” Nassetta recalled. “That they were going to write off $5.5 billion. You could imagine there would have been others around Blackstone saying, ‘Okay. If we’ve lost $5.5 billion, let’s not make it $6.5.’ It was high stakes.”
Gray said there was “obviously concern” at Blackstone about putting in more money, but “everybody bought into the idea that this was a special business, it just needed enough time to recover.”
In December 2010, Hilton cleared another hurdle. While continuing to maintain that the Starwood case alleging misappropriation of trade secrets was without merit, Hilton decided to settle to avoid prolonged legal costs. As part of the agreement, Hilton would not start a lifestyle hotel brand for two years.
By 2013, the hotel cycle had recovered sufficiently for Hilton to start thinking about taking the company public. Nassetta had opened 1,200 hotels worldwide in seven years — a 37 percent increase. He had pushed the overseas envelope: When he took over, the company was in 76 countries. By 2014, the number was 92.
Earnings were up. Profit was up. In fact, the company’s story was so positive that its “roadshow” explaining its appeal to investors lasted seven days instead of nine. Hilton took another critical step, refinancing its remaining $14 billion of debt, pushing its maturity far into the future. “We always knew that if we executed, that Blackstone would make a lot of money and we would be successful,” Jacobs said.
Dec. 13, 2013, dawned cold and clear in New York City. Nassetta, who was staying in one of the the company’s Conrad hotels, was driven in a corporate SUV to the New York Stock Exchange on Wall Street for breakfast in an ornate, ceremonial dining room with New York Stock Exchange chief executive Duncan Niedermair, Gray, bankers, attorneys and other key people in the deal.
It was a big celebration. Hilton had packed hundreds of employees from nearby hotels across the floor of the exchange. Every trader was given a Hilton bathrobe with “NYSE” monogrammed across it.
The company erected a kitchen on the floor and served breakfast, catered by Hilton waiters. Outside the exchange, a Hilton red hotel canopy hung over the entrance. The Waldorf Astoria bellhops, with baggage carts, toured the area.
“The whole place looked like a hotel,” Nassetta said. “It was just a sea of white robes.”
After Nassetta rang the ceremonial bell at 9:30 a.m., the company’s debut as a public stock, he turned to Gray and they embraced in a hug following their six-year ordeal.
“A lot of people were thinking we were going to fail,” Nassetta said. “And frankly, a lot of people were wanting us to fail. And we didn’t.”
That day, Hilton had an enterprise value of about $33 billion — ranking in the top 25 all-time initial public offerings — and a 27 percent increase over Blackstone’s 2007 purchase price. The $2.7 billion raised from the stock sale paid back preferred equity holders and helped reduce the hotel company’s debt to $12 billion.
Taking into account the company’s reduced debt, Blackstone’s 76 percent ownership stake that day was worth about $16 billion, resulting in a paper profit of more than $9.5 billion.
Last month, Blackstone sold 10.5 percent of its stake in Hilton for $2.3 billion, which was the first time the private equity firm had taken any return on its investment.
Hilton’s value continues to rise. It is now about $34 billion, boosting Blackstone’s profit to $12 billion as of last Thursday. Hilton has become the world’s largest hospitality company by rooms. It has the most deals signed with owners to build future hotels and has the most hotels under construction.