(FORTUNE Magazine) – STEPHEN A. WYNN, the 43-year-old chairman of Golden Nugget Inc., changes into a jogging suit and sinks into an armchair in his company's plush DC-9 as it soars over the Great Plains from Atlantic City to Las Vegas -- the two poles of gambling in the U.S. His company owns a casino hotel in each, two of the most profitable in the industry. Now, as the explosive growth in gambling revenues levels out in both cities, he has joined a bigger game, that of the corporate high rollers. In April he launched a takeover bid for Hilton Hotels Corp. -- a move he hoped would net him overnight three of the biggest casino hotels in Nevada and one of the most respected hotel chains in the U.S. Hilton is headed by Barron Hilton, the second-oldest son of the late Conrad Hilton. Judging strictly by the numbers, Barron, 58, has done well with his father's company. He has steered Hilton into gambling, which has gone from 0% of the company's operating income in 1970 to 40% today, and has helped earnings climb an average of 20.8% a year for the past ten years. Recently, however, Barron has run into trouble. In February the New Jersey Casino Control Commission stunned the company by rejecting its application for a license to operate a casino in Atlantic City, despite a positive recommendation by the state's Division of Gaming Enforcement, which investigates applicants for the commission. The commission cited Hilton's 13- year relationship with Sidney Korshak, a Chicago labor attorney associated with organized crime figures, as its main reason for denying the license. Hilton had already spent $320 million to build the casino -- ''the largest undertaking in the company's history,'' according to the 1984 annual report -- and planned to open it in May. Wynn and New York developer Donald Trump both offered to take the casino off Hilton's hands. In April, despite obtaining a rehearing before the commission, Hilton agreed to sell it at cost to Trump. This wasn't the first time Barron had tripped up. Twenty-one years ago he persuaded his father to sell Hilton's international hotels. Last year Hilton International, a luxury chain of 91 hotels in 44 countries now owned by Transworld Corp., earned over $63 million -- 58% as much as Hilton's chain of 253 hotels. More recently, critics have wondered why Barron, given the company's emphasis on gambling, took so long to move into Atlantic City. The company's name, its deep pockets, and its success in Las Vegas kept Hilton Hotels in the chips. Now Barron stands to lose hundreds of millions in future revenues from the Atlantic City Hilton ($30 million to $50 million this summer alone). And since Wynn has put the company in play, as they say in the takeover game, Barron may even lose Hilton Hotels itself. Barron's major problem is that he personally owns only 3.6% of Hilton. His effective control has come from a 27% block of shares in his father's estate. When Conrad Hilton died in 1979 at 91, he left that block to the Conrad N. Hilton Foundation, a California charity he incorporated in 1950, largely to promote the work of Catholic nuns. However, Barron claims that he exercised an option on those shares in 1979, paying $24 each. A Los Angeles probate court is now sorting out a tangled web of family and fiduciary relationships to decide who owns them. In the meantime, Barron's control of the company is considerably more tenuous than most people had assumed. Steve Wynn knows that. As he relaxes on the plane, he pulls out a Montecristo cigar and rolls it around in his fingers, excited about the poker game he sees himself playing with Hilton. ''You know that point where you've drawn a good hand and it's late in the game,'' he says. ''You've got a lot of money piled up in front of you and the guy across the table has a lot of money in front of him, maybe even more than you do. You think about it for a moment. Then (he moves his hands forward) you push the whole pile into the middle of the table, and you sit there with this sheepish grin on your face. ''Two things can happen: the other guy eyes the pile of money nervously and you know he is going to fold. Or else he says, 'Count it,' which means he is going to call you. That gives you a sinking feeling in the bottom of your stomach. That's where I am with Barron Hilton. Do I push in all my chips by making a public tender for the whole company, or don't I?'' Wynn grins sheepishly at the thought and then chomps off the end of his cigar. At this point in the game, Wynn has offered to buy only the 27% block of shares from Conrad Hilton's estate that is being contested. His price: $488 million, or $72 a share. He says he will buy out other shareholders at about the same price should he succeed in acquiring the estate's block. The total cost would be some $1.8 billion. Wall Street was skeptical. Hilton's stock shot up 13 points to $73 a share on Wynn's offer, but it soon settled back to the mid-60s. Hilton has more chips to play than Wynn. Hilton Hotels earned $118.3 million over the last four quarters and owns $1.2 billion in assets. Golden Nugget earned $20.6 million and its assets are two-thirds as big. Hilton quickly dismissed Wynn's offer as inadequate, raised its credit line to $600 million, and proposed several antitakeover measures that would effectively blunt a tender offer. Security analysts questioned whether Wynn could raise the cash to tender for the whole company. He confirmed their doubts when he offered to buy Hilton's Atlantic City casino largely with notes bearing interest of only 8%. That's when Hilton Hotels made a cash deal with Donald Trump. Wynn had studied the possibility of building a second casino in Atlantic City for over a year. But he claims he is not upset at being trumped. The important thing, says Wynn, was that Hilton Hotels walked away from New Jersey without a license and without clearing its name, thus making the company more vulnerable to a battle for control. ''Here's a company that gets 40% of its income from gambling and has been adjudicated as unsuitable in one of the biggest gambling markets in the world,'' says Wynn. ''As a shareholder, I would be very concerned.'' One shareholder who isn't concerned is Barron. ''Our record speaks for itself,'' he says. The setback in New Jersey alone cannot topple Hilton. ''This is a hit to our projected earnings, but it is only one of a series of projects,'' says John Giovenco, Hilton's chief financial officer. ''We have $875 million invested in 1985 alone.'' Still, coming on top of questions about Barron's control, the casino sale seems to make Hilton more vulnerable -- to Wynn or someone else. What happens next will depend largely on the probate court's decision involving the contested shares. Conrad Hilton's will is quite specific and includes several eloquent passages to guide the directors of the foundation in disbursing the money. He urged them to be generous to children. ''For, as they must bear the burden of our mistakes, so are they in their innocence the repositories of our hopes for the upward progress of humanity,'' he wrote. He singled out nuns as the children's protectors and the most deserving of support, mentioning by name the Sisters of Loretto and the Sisters of the Sacred Heart. Conrad did give Barron an option in the will, but only to buy those shares ''in excess of the permitted holdings of a private foundation.'' Currently the tax code allows foundations to own 20% of a public company, which appears to mean only 7% of the shares are in excess. Because of tax code complications arising from Barron's position as both a shareholder of Hilton and a director of the foundation, his lawyers argue that all the shares should be considered in excess and therefore open to Barron's option. They say that the Internal Revenue Service has tentatively backed this view. JAMES BATES, Conrad Hilton's personal attorney and executor of the estate, challenged Barron's interpretation of the option, saying that Barron should be entitled only to the 7%. ''Conrad Hilton wanted the foundation to have the wealth and control represented by the stock down through the years, and to distribute the tax-free dividends to charity,'' Bates told FORTUNE. The estate currently takes in $12 million in dividends a year. In 1979 Bates first asked a California probate court to rule on control of the shares. A decision was held up for over three years while Conrad Hilton's daughter by Zsa Zsa Gabor contested the will, only to lose her plea and her $100,000 inheritance (the will stipulates that if any beneficiary contests the terms, he or she would be disinherited). In the meantime, the California attorney general's office joined the case on behalf of charity, arguing that the Conrad Hilton Foundation is entitled to the shares at their current market value. The subsequent appreciation in the value of the contested shares from $24 to over $60 -- some $225 million in all -- makes the decision no small matter. Although Bates disputed Barron on the extent of his option, he agreed that Wynn's offer for the estate's stock was inadequate. Furthermore, he announced that he would vote the shares for Hilton's antitakeover measures. Bates's decision, backed by the probate court, makes Wynn's bid more difficult. But the game is not over until the judge determines who really owns the shares -- a decision expected this year. IN LAUNCHING a last-minute proxy battle to block passage of the antitakeover measures, Wynn made a big issue of Barron's management of Hilton -- a line of attack he will pursue should he eventually make a tender for all the shares. Questions about Barron's managerial abilities first arose 20 years ago, when he was being considered as a successor to his father. Several of Conrad Hilton's associates did not think Barron could do the job, citing his botched handling of the Carte Blanche credit card business Hilton started in 1959. After putting Barron in charge, Hilton lost $2 million over six years before < selling the business to Citibank. Other executives worried that Barron's attempts to push his father and the company into gambling in Las Vegas might lead to involvement with organized crime.

Barron prevailed; the company named him chief executive in 1966. By 1972 he had bought control of two casinos in Las Vegas, paying $112 million to buy what is today the Las Vegas Hilton and the Flamingo Hilton. But staying clear of the mob is a full-time job in Las Vegas. Though Hilton's reputation was as clean as its rooms, the company still became involved with questionable people. Most notably, it retained Chicago attorney Korshak as a special labor consultant at $50,000 a year. In 1976 the New York Times ran an investigative series on Korshak, detailing his role as a ''behind-the-scenes fixer'' for the mob. Barron Hilton told the New Jersey Casino Control Commission that it wasn't until reading the articles that he realized Korshak might be objectionable. Hilton asked his staff to check Korshak's background, and when they found he had never been convicted of a crime, Barron thought no further about it -- except to write Korshak a note of sympathy about the bad publicity he was getting. Hilton only severed relations with Korshak in 1984, when New Jersey's authorities made it clear Korshak was an obstacle to getting a license in Atlantic City. Why Hilton couldn't have figured that out sooner, especially since Playboy's Hugh Hefner was denied a license in 1981 partly because of his company's dealings with Korshak, puzzled some of the casino control commissioners. ''Were this not an issue raised by the Division of Gaming Enforcement here in New Jersey . . . would Hilton have severed its ties with Korshak?'' asked Carl Zeitz, one of two commissioners who voted against Hilton. Answered Barron: ''If that issue had not been raised, the chances are I would say that we would not have terminated our arrangements with Mr. Korshak . . . But since the Jersey gaming people did bring this matter to our attention -- and we know how strongly you gentlemen feel about the matter -- we did terminate.'' Barron's preoccupation with gambling led the company to de-emphasize hotels, making room for more aggressive competitors such as Marriott and Hyatt to expand in the luxury segment Hilton used to command. In 1964 Hilton spun off its international hotels to shareholders after Barron argued that the parts were worth more than the whole. Then in 1967 Barron persuaded his father, the biggest shareholder of Hilton International, to sell his interest to TWA in exchange for TWA stock. A glider pilot and aircraft buff, Barron figured TWA was still taking off. But shortly after, TWA's stock went into a nose dive, dropping from $87 a share at the time of the swap to $43 a year and a half later. When it bottomed out at $5 in 1974, Conrad Hilton was still holding on. Today it has rebounded to $48 -- or one-fifth of the 1967 price on an inflation-adjusted basis. To make matters worse, Hilton International has now moved back into the U.S. under the Vista name to compete with Hilton. Hilton's other major move under Barron worked out better. In 1975 the company sold half its equity in six major hotels to Prudential, but continued to manage the properties for a percentage of room revenues and gross profits -- one of the first management leaseback deals in the industry. Hilton received $83 million, which it used to buy back 20% of its stock, an astute purchase given the subsequent sevenfold appreciation. Prudential did well too: by one estimate, its investment has more than tripled to $226 million. Although Hilton was one of the first to use management leaseback deals, it never capitalized on the idea to build operations. Hilton owned or managed nearly 32,000 hotel rooms in 1972, about the same as in 1984. All its growth (not counting casinos) has come in franchised hotels for which no capital is required, but for which revenues are low and quality control difficult. Hilton increased franchised rooms from 11,200 in 1972 to nearly 50,000 last year -- 55% of its total. Marriott Hotels borrowed Hilton's management leaseback concept to finance much of its expansion. During the same period, Marriott increased the number of hotel rooms it owns or manages -- a strategy that requires more capital than franchising but yields a better return -- from 8,403 to 50,930. Marriott has held the percentage of franchised rooms to about 15%. As a result, Marriott's operating income from hotels has leapfrogged from $11 million in 1972 to $161 million in 1984. In the same period, Hilton's operating income from hotels (not counting casino hotels) grew from $22 million to $108 million. ''Hilton fell asleep at the wheel,'' said an industry analyst. ''All those Marriotts could have been Hiltons.'' Hilton's turn of fortunes has taken a toll on the company's top ranks. To improve its chances at a rehearing before the New Jersey Casino Control - Commission, the company let go two key executives the commission had criticized. Out were senior vice president and general counsel Timothy Applegate and senior vice president for labor relations John Cullerton. Inexplicably, Hilton retained Henri Lewin, the colorful executive vice president for casino operations. His courtesies to gamblers with questionable connections had disturbed the commission almost as much as the company's ties to Korshak. BARRON HILTON might be able to quiet the waters by taking the company private through a leveraged buyout, a move industry insiders say he is considering. The passage of antitakeover provisions might precipitate a fall in the company's stock and persuade Wynn to sell out, thus making a leveraged buyout even more attractive. ''That's one option,'' Barron told FORTUNE. ''I have other options. In the past we have gone less public by buying back some of our stock.'' Other companies are rumored to be considering tender offers for Hilton. An obvious candidate: Transworld Corp., the owner of Hilton International. For the moment, however, the only person sitting across the table from Barron Hilton is Wynn. He has done spectacularly well in casinos (FORTUNE, April 5, 1982). And he claims he can do a better job than Hilton of managing the company's Las Vegas casinos, as well as its top-of-the-line hotels such as the Waldorf Astoria (Wynn stays at the Waldorf Towers when he is in New York). ''Wynn wants to treat this company like an artichoke,'' says Hilton's Giovenco. ''He wants to buy us and strip our assets. What does that do to jobs and long-term values?'' Wynn concedes he might have to ''lighten up the company a little'' by selling off some properties. But he adds, ''I have no sympathy for Barron Hilton. I felt comfortable making this offer; it is not a personal attack. And I'm not taking advantage of a tax loophole to take the company away from some charity.'' Unless Wynn does indeed push all his chips on the table and make a public tender, however, he might not get the chance to put the issues he raises to a vote. And even then he runs the risk that Barron Hilton will say, ''Count it.'' BOX: INVESTOR'S SNAPSHOTS GOLDEN NUGGET SALES (LATEST FOUR QUARTERS) $392.7 BILLION CHANGE FROM YEAR EARLIER UP 6% NET PROFIT $20.6 MILLION CHANGE UP 43% RETURN ON COMMON STOCKHOLDERS' EQUITY 9% FIVE-YEAR AVERAGE 15% RECENT SHARE PRICE $11.75 PRICE/EARNINGS MULTIPLE 20 TOTAL RETURN TO INVESTORS (12 MONTHS TO 4/30) 10% PRINCIPAL MARKET NYSE HILTON HOTELS SALES (LATEST FOUR QUARTERS) $695.7 MILLION CHANGE FROM YEAR EARLIER 0.0% NET PROFIT $118.3 MILLION CHANGE UP 1% RETURN ON COMMON STOCKHOLDERS' EQUITY 20% FIVE-YEAR AVERAGE 19% RECENT SHARE PRICE $67.25 PRICE/EARNINGS MULTIPLE 15 TOTAL RETURN TO INVESTORS (12 MONTHS TO 4/30) 44% PRINCIPAL MARKET NYSE Explanatory notes: page 176