Hilton, Caesars Jump on Deal Speculation
Takeover talk is again riling the stocks of the two biggest casino companies based in Los Angeles. But investors who’ve played at this table before may sense that the odds of closing a deal soon are no better than even.
On Thursday, Hilton Hotels Corp. officially put itself up for sale again, a move that had been rumored all year but that still sparked a buying rush in the stock. Hilton shares rocketed $10 to $67.875 on the NYSE.
Meanwhile, Caesars World Inc. shares jumped $1.625 to $43.75 after rival gaming firm Bally Entertainment Corp. confirmed that it wants Federal Trade Commission approval to buy as much as 15% of Caesars’ stock.
Hilton, in its brief announcement, said it has hired investment banker Smith Barney “to undertake a study and make recommendations to management and the board of directors for strategic alternatives to enhance shareholder value.”
Hilton said its alternatives “may include a sale of the entire company in one or a series of transactions, spinoff of one or more of its businesses, recapitalization, business combination, share repurchase program or similar transaction.”
Analysts said the breadth of that options menu suggests that Chairman Barron Hilton may have already been approached, if informally, by potential buyers and is now on the defensive. The stock surged in September on rumors that an investor group wanted to buy the company and break it up.
Though shares owned by Barron Hilton and by his late father’s foundation account for 34% of the company’s outstanding stock, many Wall Streeters believe that a strong bidder offering a high enough price could force the Hilton family into a deal.
But veteran Hilton watchers also note that this is the second time in five years that Hilton has said it might sell out. The first go-round, in 1989, sent the stock rocketing to $115--only to collapse soon afterward when the junk bond market imploded and takeover mania crested. The flurry of bids that Barron Hilton expected in 1989 never materialized.
Today, most analysts agree that the Hilton assets--240 hotels enjoying surging occupancy and a highly profitable gaming business--are extraordinarily attractive. The issue is whether Barron Hilton, at 66, is really ready to sell.
Independent gaming analyst Marvin Roffman in Philadelphia argues that Hilton has effectively been for sale for so long that Barron Hilton hardly needed to hire Smith Barney to flush out possible buyers. “If anybody was interested, they’d be calling Barron,” Roffman said.
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Thus Thursday’s announcement could mean that Barron Hilton is mulling a defensive move--a recapitalization or spinoff that would boost the stock by unlocking “hidden” value in the firm but leave the Hilton family in control. “He may just want to position the company better for sale later,” said Jim Schmitt, a Hilton watcher at WestCountry Financial in Santa Barbara.
In the past, Wall Streeters suggested that Hilton could partially spin off its Nevada gaming operations or sell a trophy property such as the Waldorf-Astoria in New York and use the proceeds to buy back stock.
Sold or restructured, Schmitt and other analysts have argued that Hilton’s true value is more in the $90-a-share range--about a third more than the current price. But the caveat is that Barron Hilton is unpredictable. What’s more, one analyst contends, “he’s going to look out for his interests--not necessarily for other shareholders.’ ”
Caesars World, meanwhile, is another example of a very attractive franchise that has long been considered a prime takeover candidate. Caesars’ premier asset is its Las Vegas hotel-casino, which by virtue of its cachet and its location (in the center of the Strip) makes it one of gambling’s crown jewels. The company also owns resorts in Lake Tahoe; Atlantic City, N.J., and in Pennsylvania’s Pocono Mountains, but they are considered much less important to a potential buyer than the Vegas property and the franchise name itself.
Most larger gaming firms have long been considered possible bidders for Caesars, including ITT Corp. (owner of Sheraton hotels), Mirage Resorts and Promus (which owns Harrah’s).
But Bally Entertainment, which owns hotel-casinos in Vegas, Atlantic City and Mississippi and now says it may buy up to 15% of Caesars’ stock, isn’t taken seriously as a bidder for the entire Caesars franchise. Bally, analysts note, is heavily indebted, much smaller than Caesars and has plenty of other pressing issues to deal with, including the proposed spinoff of its health-and-tennis clubs division.
So what is Bally CEO Arthur Goldberg up to with Caesars? Last summer he announced plans to buy stock in stumbling casino rival Circus Circus, accumulated a small stake, then sold out at a profit. Many analysts are suspicious that he’s planning to do the same with any Caesars stake he buys. Caesars had no comment on Bally’s FTC request on Thursday.
It’s possible, of course, that Goldberg’s implied threat could compel ITT or other, bigger firms to finally decide whether they want Caesars. Any bid is expected to be closer to $60-a-share than the current $43.75. But as alluring a franchise as it is, analysts warn that Caesars Chairman Henry Gluck seems to have no interest in selling and that he has armed the company with formidable poison pills that could dissuade any potential buyer from stepping up.
Nonetheless, some analysts say the Hilton and Bally announcements may at least refocus investors on the value in some of the gaming giants’ stocks. Fear of casino saturation in some regions (like Mississippi), and Wall Street’s general loss of fascination with the industry, have pulled the stocks down in 1994 to levels that may be attractive to long-term investors who figure gaming’s popularity worldwide is far from peaking.
Hailing Caesar
Shares of gaming company Caesars World, a perennial takeover candidate, have swung widely over the past two years but are no higher today than in January, 1993. Monthly closes, except latest:
Thursday: $43.75
Source: TradeLine
The Gaming Giants
How stocks of major gaming companies have performed this year and the stocks’ price-to-earnings ratios based on analysts’ average earnings-per-share estimates for 1995:
52-week Thurs. P-E on est. Company high-low price ’95 EPS Aztar $7 7/8-$5 3/8 $5 7/8 10 Caesars World 59-35 3/4 43 3/4 11 Circus Circus 40 3/4-20 1/2 21 5/8 11 Hilton Hotels 74-44 3/8 67 7/8 21 ITT/Sheraton 94 7/8-78 5/8 85 5/8 9 MGM Grand 43 3/8-22 5/8 25 7/8 15 Mirage Resorts 27-16 5/8 20 1/2 14 Promus Cos. 55 1/4-27 1/8 29 1/2 16
Note: All stocks trade on NYSE. NA: not available.
Source: Zacks Investment Research
