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Hilton doubles down
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June 30, 1998: 8:28 p.m. ET
Gaming unit merging with Grand Casinos in $1.2B stock and debt deal
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NEW YORK (CNNfn) - Hilton Hotels Corp. Tuesday agreed to merge its gambling operations with Grand Casinos Inc. for $1.2 billion in stock and debt assumption, forming what the companies say will be the world's largest casino gaming company.
Hilton (HLT) also said it is splitting its hotel and gambling operations into separate companies.
Appearing Tuesday on "Moneyline News Hour with Lou Dobbs," Hilton President and Chief Executive Officer Stephen Bollenbach said the split should allow the gaming segment of the company to grow rapidly.
"The best thing it will bring is two different stocks where shareholders can choose whether they want a gaming or hotel stock.
"We will find the gaming company can grow rapidly. We can make acquisitions and each one will be accretive to earnings. It lets us free that business to grow on its own," he said.
Under terms of the deal, Hilton shareholders will receive one share of the new gaming company for every share owned in Hilton Hotels Corp. in a tax-free distribution.
Hilton's gambling unit will then merge with Grand Casinos' gaming operations in Tunica, Biloxi and Gulfport, Miss.
Minnetonka, Minn.-based Grand Casinos (GND) operates small and mid-size casinos in the South and Midwest.
Both companies' boards have approved the transaction, which they expect to be completed by the end of the year.
The name of the new gaming company will be determined at a later date, the companies said.
Investors reacted coolly to the deal. Hilton (HLT) shares closed off 2-7/8 to 28-5/8. Grand Casinos (GND) shares slipped 1-1/2 to 17.
Bollenbach said he was surprised by the market reaction because the deal should make Hilton's stock more valuable.
(Click here to see a chart of Hilton's 52-week stock activity)
Analysts said the deal finally gives Hilton a presence in Mississippi, which is the third-largest gaming market in the United States.
Tom Burnett, an analyst at Merger Insight, said the deal provides both companies with greater diversification.
"Grand Casinos shareholders get a stake in the [Native American] casinos, which have a higher valuation because of the uniqueness of that property," he said. "Hilton gets a chance for growth by expanding into Mississippi."
David Wolfe, an analyst at CIBC Oppenheimer, expressed caution, pointing out that the deal also means a greater risk for Hilton because it is expanding at a time when the casino gaming industry as a whole has been struggling because of increased competition.
"They've raised their risk hurdle in the short term," Wolfe said. "They're owning more assets when the industry is under siege. But if they didn't make a move they'd be in trouble."
Wolfe also pointed out the deal was crucial to Grand Casinos' survival.
(Click here to see a chart of Grand Casinos' 52-week stock activity)
"They were going nowhere," he said. "I think you'll see all the small- and mid-cap [gaming companies] get consumed [by larger companies]."
Bollenbach said spinning off the gaming unit will facilitate more acquisitions.
"There are a lot of bargains out there," Bollenbach said. "Every acquisition you make is accretive to earnings. It's a real value creator."
Bollenbach said acquisitions will be a key element of the company's strategy going forward. (165K WAV) or (165K AIFF)
Bollenbach had tried for months to strike a blockbuster deal. The company lost a bid to acquire ITT Corp. (ITT), which was bought by Starwood Hotels & Resorts Trust (HOT).
In March, Hilton's talks for a $2.8 billion merger with Circus Circus Enterprises Inc. (CIR), which would have created the world's largest gambling company, broke down.
Under terms of Tuesday's merger, Hilton shareholders will own approximately 86.4 percent of the new gaming company, with Grand Casinos shareholders owning 13.6 percent.
Hilton said $550 million of Grand Casinos' outstanding debt is included in the $1.2 billion merger.
Hilton added the new gaming company and Hilton Hotels will have "relatively equal amounts of net debt."
Grand Casinos will spin off its Native American casinos to its shareholders.
Hilton's Bollenbach will be chairman of the new gaming company. Arthur Goldberg, president of Hilton's gaming operations, will be the new company's president and chief executive officer.
Grand Casinos Chairman Lyle Berman will serve on the new company's board of directors.
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