Aug 8, 2020 in Case Study

Case Study Sample

Summary

Hilton is a famous hotel chain that operates worldwide. The case under consideration studies the privatization of Hilton by Blackstone and its issues. The Blackstone Real Estate Group began analyzing Hilton hotels in 2006. Although the hotels were famous and luxurious and the chain of hotels operated worldwide, the stock price was still low, lower than for the main competitor Marriot International. Thus, Blackstone focused on finding the reasons for such a situation. Analysts found that the company was undermanaged and it had a large potential to expand. First, Hilton had good chances to expand out of the USA. Second, it could expand the management and franchise model based on its strong brands. This model was more profitable that owning real estate. Cooperating with hotel owners promised to be profitable and to have low risks. There would be two types of hotels - owned and managed by third parties and owned by third parties but managed by Hilton. Such a strategy was expected to increase EBITDA significantly. Third, Hilton had good cost saving opportunities, and it was possible to use them to increase EBITDA and stock price (Lietz, 2015, pp. 1-2).

After analyzing the opportunities to expand, the Blackstone Real Estate Group was ready to buy Hilton. This equity investment would be the highest for the company. The transaction was financed by Goldman Sacks, Deutsche Bank, Morgan Stanley, and other famous financial institutions. Blackstone focused on forming a new management team. The name Hilton Hotels was replaced with a new name Hilton Worldwide (Lietz, 2015, pp. 3-4).

The new company was established. However, it faced great problems with performance as the global economic crisis started in 2008. The same situation was with the main competitors. Thus, the managers focused on finding the ways to cope with that decline. They had several alternatives to consider. Business operations were restructured to increase EBITDA. New M&F contracts were signed. Although they were not very efficient, the managers believed that they would increase business efficiency in the nearest future. Hilton could buy additional equity from its investors. It could also raise capital from other funds and investment partnerships. It was also possible to restructure the debt in various ways. Finally, Hilton could receive new equity from third party investors. It was hard to make a choice (Lietz, 2015, pp. 4-8).

Analysis

It is necessary to decide what decision to make in order to improve the performance of Hilton. It is quite hard because the crisis has influenced the entire hotel industry. Nevertheless, the indicators of main competitors remained a bit better. Thus, the decision should be made to improve Hiltons performance currently or in the nearest future.

Business operations restructuration seems to be a good alternative for the improvement of general performance. However, this alternative has both advantages and disadvantages. The advantages are that improved operations can lead to significant improvement of performance and financial indicators. The disadvantages include the fact that restructuring of operations can be difficult and it requires much time and efforts. Moreover, it is not always possible to restructure the operations and to make them better than the previous ones. The result of restructuring cannot always be predicted exactly. Therefore, for such a decision to make, it is better to focus on the experiences of competitors that have already restructured their operations successfully and do the similar things to improve the performance of Hilton.

New M&F contracts are also good alternatives for Hilton. Owning hotels and other assets may turn out to be too expensive for Hilton, and it may not cover its costs. Thus, management and franchising is a good choice to cut costs but still receive revenues from selling franchises and managing hotels. The market analysis shows that the demand for lodging is not stable and usually cyclical. Thus, it may turn that the spread of M&F operations is not profitable currently, but it can be more profitable in the nearest future. Thus, M&F contracts should be considered by Hilton as a good alternative that is likely to be profitable in the future and that has low risks and guaranteed revenues.

Buying additional equity from investors is not a bad alternative, but it has some risks. Additional equity can be expensive, but it may not bring profits. Moreover, not all investors seemed to be willing to participate in this operation because they had suffered from crisis too. Additional capital could help at once, but it is possible that Hilton will not be able to repay it in the future. Thus, such an operation is quite risky and it may lead to other problems. Additional equity can be bought but not in a large amount.

Raising capital from other funds and investment partnerships seems risky too. It is not clear if the situation stabilizes or worsens during the crisis. Thus, it is not clear if Hilton will be able to repay its debts, and they are already large. A variant to restructure the debt in various ways seems to be more viable. Several alternatives of restructuring should be analyzed, and the best one should be chosen. It is better to choose a variant with low losses and risks. It is possible to restructure not the whole debt but its part only, and it can help to improve Hiltons current performance. Raising new equity from the third party investors is risky too because Hilton may fail to repay this equity.

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Conclusion

In conclusion, Hilton can use several alternatives and combine them to improve its performance. The improvement may not be immediate but reasonable in the future. Hilton should continue restructuring its operations to improve performance. Signing additional M&F contracts can also help to receive additional revenues when the demand for lodging increases. Acquiring additional equity is too risky, but it is still possible to restructure the part of the debt to improve the current performance.

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