The Blackstone Group, which took the Hilton hotel group public on Thursday, has increased the value of its investment by nearly $10 billion through a combination of lucky timing, smart financial engineering and disciplined management. In the topsy-turvy world of private equity math, however, that huge gain might at first glance look like a multibillion-dollar loss, DealBook’s David Gelles writes. After all, the initial market capitalization of Hilton Worldwide Holdings on Thursday was $20 billion, compared with the headline-grabbing price of $26 billion that Blackstone paid when it took Hilton private in 2007.
In buying the hotel company, Blackstone contributed about $5.5 billion of cash to the deal and borrowed about $20.5 billion from big banks. Over the next couple of years, the private equity firm used profits from Hilton to pay down that debt, opting against paying itself special dividends. When the financial crisis hit, Blackstone wrote down the value of its investment by more than half, causing the value of the banks’ debt to plummet. In 2009, it looked as if the Hilton deal could turn out to be a disaster.
But Blackstone approached its lenders in 2010 and offered to restructure the deal, buying back some of the bank debt at a discount. Some lenders received just 35 cents on the dollar, while other lenders converted their debt into preferred equity. Blackstone agreed to inject more capital into the business, bringing its total equity investment to around $6.5 billion. Between its regular debt servicing, the restructuring in 2010 and proceeds from the initial public offering, Hilton will have about $12 billion in debt, down from $20.5 billion at the time of the buyout.
“They’ve accomplished a lot through leverage,†said Robert M. La Forgia, the chief financial officer of Hilton at the time of its sale, who now runs Apertor, a hospitality consultant firm. “They almost lost the company, and might have without the debt restructuring.â€
A separate Blackstone I.P.O. paid some rather adorable dividends on Thursday. About a dozen kindergartners, and a few high-powered financiers, gathered at the firm’s Midtown Manhattan headquarters to get up close with eight animal ambassadors from Sea World, the theme park operator that the firm took public this year, DealBook’s Michael J. de la Merced reports.
Among the dignitaries the group greeted were Pete and Penny, Magellanic penguins brought in from Sea World’s Orlando, Fla., park, in addition to Sophia and King, Eurasian eagle owls that hailed from Tampa, Fla., and San Diego. Shivers and Journey, Siberian huskies from Tampa, were also in attendance.
A FRESH MORTGAGE PENALTY FOR BANK OF AMERICA  | “The fallout from the bursting of the housing bubble continues to plague Wall Street,†Matthew Goldstein reports in DealBook. “Bank of America agreed on Thursday to pay the Securities and Exchange Commission a $131.8 million penalty to settle an investigation linked to the structuring and sale of two complex mortgage securities that its Merrill Lynch division sold to investors.
“The settlement arises from a series of collateralized debt obligations that Merrill Lynch cobbled together and marketed. The hedge fund Magnetar Capital, based in Evanston, Ill., had a role in helping pick some of the mortgage securities in the C.D.O.’s. The S.E.C., in an administrative order, accused Merrill Lynch of misleading investors by failing to disclose Magnetar’s role in influencing the selection of the underlying securities in the C.D.O.’s. Merrill Lynch also failed to disclose that the hedge fund had not only invested in the deal but was also shorting, or betting against, its performance in some instances, the S.E.C. said.â€
ON THE AGENDA Â |Â The producer price index for November is released at 8:30 a.m. Peter R. Orszag, a former White House official who is a vice chairman at Citigroup, is on CNBC at 4:30 p.m.
$25 MILLION IN FINANCING FOR A BITCOIN FIRM Â |Â Silicon Valley is increasing its real money bets on the virtual currency known as Bitcoin. The venture capital firm Andreessen Horowitz announced on Thursday that it had led a $25 million fund-raising round for Coinbase, a Bitcoin start-up in San Francisco that aims to help virtual currencies gain mainstream acceptance, Nathaniel Popper reports in DealBook. The size of the financing round dwarfs the previous largest fund-raising effort by a Bitcoin company, Circle Internet Financial, which raised $9 million in October from investment firms including Accel Partners.
“It’s hard to overstate the excitement of a certain segment of the technology community,†Chris Dixon, a partner at Andreessen Horowitz who will join Coinbase’s board, said on Thursday. “Every day somebody comes in and says, ‘Bitcoin is going to be as big as the Internet.’â€
A.I.G. Said to Be in Talks With New Bidder for Its Aircraft Leasing Unit  | The insurer is in discussions with AerCap, another aircraft lessor, over a potential sale of the International Lease Finance Corporation for about $5 billion. DealBook »
Microsoft Is Said to Consider Qualcomm Executive for Top Job  | Steven M. Mollenkopf, the chief operating officer of Qualcomm, is among the candidates Microsoft is considering to succeed Steven A. Ballmer as chief executive, according to Bloomberg News. BLOOMBERG NEWS
G.M. Sells Rest of Stake in Ally Financial  | General Motors sold the 8.5 percent stake in its onetime financing arm through a private placement of shares for $900 million. DealBook »
Coke to Divide North American Business in Two Units  | The Coca-Cola Company said it would split its North American operations into two units, as it seeks to return to a franchise model, Reuters reports. REUTERS
The Deals That Weren’t  | Quartz recounts some of the “biggest M.&A. fails of 2013,†including BlackBerry’s failure to sell itself. QUARTZ
Ziggo Still Has Cards to Play in Liberty Global Talks  | Now that Ziggo, the Dutch cable group, has conceded a willingness to sell to Liberty, its task is to get full value from a weak position, Quentin Webb of Reuters Breakingviews writes. REUTERS BREAKINGVIEWS
Little Sympathy for Big Banks  | Banks have gone from being viewed as national champions â€" proof of a country’s standing in the world â€" to being seen as a potential source of national disaster, Floyd Norris writes in the High & Low Finance column in The New York Times. DealBook »
Wall Street Trade Group Names New Leader  | The Securities Industry and Financial Markets Association has appointed Kenneth E. Bentsen Jr., its president, as chief executive, succeeding Judd Gregg. DealBook »
How a Physics Puzzle Helps Explain Markets  | The Schrödinger’s cat thought experiment, “intended to demonstrate the eccentricity of a certain school of quantum physics, makes a satisfying analogy for the state of markets after five years of quantitative easing by the Federal Reserve,†The Financial Times writes. FINANCIAL TIMES
A Senior Trader Returns to Credit Suisse  | After leaving his job as a senior trader at Credit Suisse for the hedge fund Brevan Howard in April, Neilan Govender is back at the Swiss bank, Financial News reports. FINANCIAL NEWS
Sycamore Partners Closes In on Jones Group  | The Wall Street Journal reports: “Jones Group Inc. is nearing a deal to sell itself to private equity firm Sycamore Partners, according to a person familiar with the matter, in a takeover that would value the footwear and apparel maker at roughly $1.2 billion.†WALL STREET JOURNAL
Hedge Fund Inflated Value of Coal Investment and Client Fees, S.E.C. Says  | GLG Partners has agreed to pay almost $9 million to settle charges that it overvalued its investment in a Siberian company, and in turn, inflated client fees. DealBook »
SAC Is Said to Consider Changing Its Name  | The Wall Street Journal reports: “SAC Capital Advisors LP is considering big changes to its business as it restructures, including scaling back relationships with some Wall Street banks and perhaps changing its name, according to people familiar with the matter.†WALL STREET JOURNAL
Instagram Unveils Private Messaging Service  | “The introduction of Instagram Direct, available for iPhone and Android users, comes at a time when private messaging services like Snapchat and WhatsApp are rising in popularity among mobile users,†Jenna Wortham reports in the Bits blog. NEW YORK TIMES BITS
Twitter’s Plans for Its MoPub Acquisition  | “Twitter pulled the covers back on how it plans to make money off mobile apps besides its own. The strategy: take its native advertising playbook to the wider mobile world,†The Wall Street Journal writes. WALL STREET JOURNAL
Virtual Reality Start-Up Attracts $75 Million  | Andreessen Horowitz has led a $75 million investment round in Oculus, a company that makes virtual reality headgear. Marc Andreessen and Chris Dixon, two partners at the venture capital firm, are joining the board of Oculus. THE VERGE
Treasury Urges More Federal Oversight of Insurance  | The wide-ranging recommendations on how to strengthen regulation still leave broad areas of the $7 trillion industry under state oversight. DealBook »
Prosecutor Who Oversaw Swiss Bank Case Moves to Private Practice  | David B. Massey, a federal prosecutor who played a significant role in government’s sweeping investigation into insider trading in the hedge fund industry, is joining the white-collar defense firm Richards, Kibbe & Orbe. DealBook »
The Volcker Rule Arrives, And Not a Moment Too Soon  | “In a hopeful sign that regulators mean business, the final version of the rule is stronger than earlier drafts in crucial ways,†the editorial board of The New York Times writes. NEW YORK TIMES
Mexico May Open Oil to Outsiders  | “In what could be the biggest economic change in two decades, President Enrique Peña Nieto is on the verge of rewriting the Constitution to open Mexico’s oil, gas and electricity industry to private investment â€" a provocative move expected to lure international oil companies and expand North America’s energy supply while testing the grip oil has on Mexico’s soul,†The New York Times writes. NEW YORK TIMES
New Obama Adviser Has Corporate Ties  | John D. Podesta, the founder of the Center for American Progress who was named a senior adviser to President Obama, will “arrive at the White House after having run an organization that has taken millions of dollars in corporate donations in recent years and has its own team of lobbyists who have pushed an agenda that sometimes echoes the interests of these corporate supporters,†The New York Times reports. NEW YORK TIMES
