Hilton splitting off, pairing off gambling unit Business will merge with part of Grand Casinos in stock-and-debt deal


July 01, 1998|By BLOOMBERG NEWS

LOS ANGELES -- Hilton Hotels Corp., which has been searching for months for a merger or another way to boost its stock, said yesterday that it will split off its gambling unit into a separate company and merge it with part of Grand Casinos Inc.

Hilton agreed to buy Grand Casinos' three hotels in Mississippi for $650 million in stock and $550 million in assumed debt, and merge the gaming businesses of those companies.

Grand Casinos, based in Minnetonka, Minn., will spin off its Indian casino management business and other assets to its shareholders as part of the deal.

The deal creates the nation's largest gambling company and gives Hilton a 35 percent share in Mississippi, the nation's third-largest gambling market.

The deal is the bold move that shareholders have been expecting since Hilton Chief Executive Stephen Bollenbach took over in 1996.

But it left some investors asking why Bollenbach moved before knowing how much a $600 million Mississippi resort being built by Stephen Wynn's Mirage Resorts Inc. will cut into the Grand Casinos' business.

"I don't understand the timing of this transaction," Larry Haverty, analyst for State Street Research and Management, said in a conference call. "Wouldn't it be better to see how they fare when Steve Wynn opens his new facility?" State Street owned 22,000 Hilton shares in March.

Wall Street was not impressed. Hilton stock fell $2.9375 to close at $28.5625, and Grand Casinos lost $1.75 to $16.75 on the New York Stock Exchange.

"It's not a compelling deal in terms of structure. Also, this breakup has been debated inside and outside of the company for 12 years. By the time they did it, it was anticlimactic," said Harold Vogel, analyst with Cowen & Co. "For these reasons, I think there is a kind of a sell-off."

Bollenbach said he was surprised and disappointed by the market reaction.

"It's like the hotel business four or five years ago. It was uncertain; people didn't like it. It turned out you could make about a 300 percent return on your investment," he said in a conference call.

"If you wait until the world has perfect knowledge, there's no opportunity for extraordinary profits."

Profits of upscale hotels such as Hilton's have risen in recent years as the strong economy has spurred travel. Meanwhile, a glut of casino resorts in Las Vegas and Atlantic City has prompted casino operators to slash room rates and spend more on promotion, hurting profits.

Bollenbach has sought ways to build the hotel side while separating it from the slumping casino business.

"The reality is that some shareholders aren't interested in the gaming side of the business," said Bollenbach, who will remain chief executive of the hotel company and become chairman of the new casino company. "So we let them make their own choice."

Grand Casinos shares declined because investors are confused about how to value the stock they will receive in the casino company, analysts said. Hilton stockholders will own 86.4 percent of the casino business and Grand Casinos shareholders will own 13.6 percent.

The exact number of shares that Grand Casino shareholders receive will depend on the share prices of the companies when the purchase closes.

Hilton shareholders will receive one share of the hotel company and one of the casino company for each of their Hilton shares.

The casino company will issue about $650 million in stock and assume $550 million of debt for the Mississippi properties.

Pub Date: 7/01/98

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