Adding to the woes of private-equity giant Blackstone, its ambitious expansion plans for its Hilton hotel division have hit two snags, with projects canceled or delayed from Beverly Hills to India.
 
Blackstone, which sustained a $500 million loss in the third quarter, has maintained until recently that the financial crisis would not hamper its ambitious expansion plans for Hilton. But earlier this month, its development partner in India, DLF, with which Hilton had planned to build 75 hotels, announced it was delaying the first 17 due to what it initially described as Hilton's inability to secure capital. A Hilton spokesperson denied that the company is having trouble securing capital and attributed the delays to the global credit crunch. Hilton plans to build 1,000 new hotels outside of the U.S., in addition to 1,000 new ones domestically.
 
In another blow, voters in Beverly Hills shot down a proposal by Hilton to build a new Waldorf-Astoria—one of Hilton's sub-brands. The new Waldorf had been approved narrowly by the city council, but opponents had gathered the signatures to take the matter to the voters in the form of a ballot question. Hilton's new C.E.O., Chris Nassetta, promptly sent a letter to supporters announcing that "Hilton Hotels Corp. will not wait another three years for a Waldorf-Astoria to be approved in Beverly Hills. Instead, we will be forced to pursue other options." The Beverly Hills project was considered key to Blackstone's plan to accelerate the growth of the Waldorf-Astoria brand and bolster Hilton's somewhat meager luxury holdings in the short term.
 
These setbacks cast a further pall on Blackstone's October 2007 purchase of Hilton, in one of the last big deals of the buyout boom, for $26 billion, including $20 billion in debt. Industry analysts say that the success of the Hilton acquisition, which made Blackstone the world's biggest hotel owner, rests on an immense expansion of Hilton and its sub-brands, like Waldorf-Astoria, Embassy Suites, Homewood Suites, and Hilton Garden Inn. Yet the fortunes of the hotel industry are inextricably linked to the strength of the economy, and now that the economy, both in the U.S. and increasingly abroad, has hit the skids, hotel share prices have gone through the floor, and companies are starting to hedge, canceling hundreds of new properties that were scheduled to go online in the next couple of years. Occupancy in all major U.S. cities (save for New Orleans) fell this year, and according to industry analysts Smith Travel Research, it is expected to drop an additional 3 percent in 2009.
 
Hilton growth strategy has been less affected by the downturn so far because the company relies heavily on a franchise model rather than risking its own capital on new projects, and the majority of new hotels in its pipeline are smaller-scale. Thus their developers are capitalized by small banks, and not the larger ones that presently teeter on the edge of oblivion.
 
It's not just executives and investors who have a stake in Hilton's ability to prosper in the economic freefall, it's the U.S. taxpayer too. When Bear Stearns, one of the seven banks that put together the financing package with which Blackstone acquired Hilton, was bought by J.P. Morgan, $4 billion in debt associated with the Hilton deal was taken over by the Fed—part of the $30 billion in illiquid assets the Fed assumed to entice Morgan into buying the collapsing Bear.