Is Hilton Hotels Takeover Talk Just Same Room With Different Sheets?
In a market hungry for takeover-stock candidates, Hilton Hotels Corp. is again showing up near the top of the menu.
Hilton shares soared $7.875 to $66.625 early Tuesday after USA Today’s Dan Dorfman wrote that an unnamed investor group is looking to buy and break up the Beverly Hills-based hotel and casino giant.
But after Hilton made the unusual move of officially denying that it is in any deal talks--though it would say no more than that--the stock dropped back to close at $64.375, still up $5.625 on the day.
On Wall Street, the question of asset-rich Hilton’s sale or breakup seems to have become a matter of when rather than if. Takeover rumors drove the stock up to $74 last winter and riled it again in July. At age 66, Chairman and CEO Barron Hilton is widely viewed--rightly or wrongly--as open to a deal at the right price.
Yet in the back of many takeover-stock traders’ minds is the painful memory of 1989, when Barron Hilton first agreed to entertain buyout offers. The stock hit $115 that summer largely on the assumption that starry-eyed Japanese investors would pay dearly for the Hilton name.
Instead, autumn of 1989 marked the beginning of the end of Japan’s “bubble” economy, and with it the inflated fortunes of many Japanese industrialists and bankers. In the United States, meanwhile, the 1980s takeover binge died that fall as the junk bond market collapsed.
By March, 1990, the Hilton company found itself with just one serious buyout offer on the table, a bid worth about $76 a share from real estate firm JMB Realty. A disappointed Barron Hilton pulled the company off the auction block, and the stock tumbled as low as $26.375 in late 1990.
For arbitragers who make a living betting on takeovers, the massive losses incurred in the Hilton stock run-up and subsequent collapse in 1989-90 have left a deep scar. “You’d have to be on your third martini before you’d begin to think about buying this stock” solely on takeover rumors, one New York arb said Tuesday.
What’s more, many Wall Street analysts don’t believe that Barron Hilton, who owns about 25% of the company’s stock directly and indirectly and thus must bless any deal, has any overriding reason to sell now. The hotel business is booming again after years of room oversupply, and Hilton’s plan to leverage its casino know-how worldwide holds tremendous potential. Second-quarter earnings were up 26% versus a year earlier, and Wall Street expects the firm to earn a record $3.13 a share next year, up from about $2.40 this year.
“There is no reason he (Barron Hilton) would put this company up for sale today,” argues Bruce Turner, analyst with brokerage Salomon Bros.
The assumption there, however, is that a deal would be Barron Hilton’s choice as opposed to something forced on him. Though his stock holdings and those of his late father’s foundation, the Conrad N. Hilton Foundation, account for about 34% of Hilton’s total shares, that still leaves the majority in public investors’ hands.
A hostile takeover could be messy, especially given the often long approval process for change of control of casino licenses. But it wouldn’t be impossible. With financing for big deals readily available, at the right price institutional holders of the stock would undoubtedly cash in regardless of Barron Hilton’s wishes.
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“They (the Hilton family) don’t own enough to stop” a hostile deal, says money manager Robert Bacarella, whose Monetta Financial in Wheaton, Ill., has held Hilton stock since 1993.
Yet Bacarella says he didn’t buy the stock hoping for a buyout, but rather was attracted by the fundamentals of the hotel and casino businesses. “I view Hilton as a growth company,” he says.
After years of struggling with a horribly overbuilt hotel market in the United States, Hilton’s occupancy rate for its 240 hotels was 74% in August, the highest since the late 1980s.
More important, the company has begun to move aggressively to expand its casino business globally, as more countries and states legalize gambling.
Hilton already derives most of its earnings from gaming, mainly in Nevada: The casino division accounted for 71% of the firm’s $240 million in 1993 operating income (on total sales of $1.4 billion).
Barron Hilton clearly delineated the company’s course when he picked casino-business veteran Raymond Avansino Jr. as his No. 2 man in 1993. Using its five huge Nevada hotel-casino properties as a jumping-off point, Hilton has launched a worldwide search for new gaming sites.
The firm now operates a New Orleans casino and a Windsor, Canada, facility, both in partnerships with other gaming companies. In addition, Hilton will open a hotel-casino in Brisbane, Australia, next spring, is bidding on other Mississippi River sites and is developing casino projects in locales as far away as Uruguay and Egypt.
James Schmitt, whose WestCountry Financial in Santa Barbara has long followed Hilton, believes the company is finally on the verge of realizing its full potential--something that undoubtedly isn’t lost on possible bidders. Similarly, Hilton rival Caesars World, another marquee gaming name, also has become a rumored buyout target.
Total up the value of the Hilton franchise name, the Nevada gaming properties and the firm’s “trophy” hotels such as the Waldorf-Astoria in New York, and the assets are easily worth $90 a share or more, Schmitt figures. At that price, Hilton would cost a potential buyer $4.3 billion--a mid-size deal in today’s market.
But would Barron Hilton put up a fight against hostile bidders? At a minimum, Schmitt says, the 1989 agreement between Barron Hilton and the charitable trust that holds 6 million of the late Conrad Hilton’s stock stipulates that Barron Hilton can’t sell out for less than $75 a share.
Beyond that, Schmitt says, the trust is structured so that Barron Hilton personally gets a much larger windfall from the trust’s shares if he sells Hilton sooner rather than later within the next 15 years.
Alternatively, Barron Hilton could simply do what any potential bidder might have in mind: Sell off some trophy assets, spin off the non-gaming-hotel business as a separate entity or otherwise engineer a financial restructuring to realize the company’s hidden asset value.
Schmitt says he doesn’t pretend to read Barron Hilton’s mind. He simply compares Hilton Hotels to entertainment giant MCA Inc., which was forever in the rumor mill until it was finally sold for a hefty premium to Japan’s Matsushita in 1991: “When it (Hilton) gets taken out it will be for full value.”
The Hilton Story
Hilton Hotels Corp. stock soared to $115.50 in 1989 on takeover speculation, but no deal ever occured. Rumors have periodically rocked the stock since then. Hilton Hotels high share price each quarter on the NYSE, except latest:
Tuesday: $64.38
