Hilton Hotels to Exit Gambling Business With Spinoff-Merger


In a sign of the uncertainty hanging over the nation’s gambling industry, Hilton Hotels Corp. on Tuesday said it will spin off its gaming operations into an independent company that will then merge with a Mississippi casino operator in a deal valued at $1.2 billion.

The split would end Beverly Hills-based Hilton’s nearly 30-year involvement in the gambling business, which is suffering from intense competition, slower growth and shrinking profit margins. Instead, Hilton--the world’s largest operator of casino hotels--will remain focused on its highly lucrative hotel business.

“This is a new dawn for us,” said Hilton President and Chief Executive Stephen F. Bollenbach. “We are very excited about it.”

Wall Street investors, however, were disappointed with the announcement, sending Hilton shares plunging nearly 10%. Many investors had apparently been betting on a much larger and more dramatic transformation and were also concerned about the growing competition in Mississippi, where the Hilton spinoff would merge with the three casinos owned by Grand Casinos Inc.


Most gambling markets “are intensely competitive and likely to stay that way,” said gaming and lodging industry analyst John J. Rohs at Schroder & Co.

Bollenbach’s plan to break up the company is an effort to take advantage of the enormous profit being generated by its hotel operations. The hotel division’s stellar performance has been overshadowed by the disappointing results of the gaming division. As a result, Hilton’s stock has stagnated and failed to reflect the profit potential of its hotel chain, according to company executives and industry analysts.

The spinoff of the gambling operations marks a dramatic swing in corporate strategy for Hilton. Only last year, Bollenbach launched a bitter takeover battle for ITT Corp.--owner of Sheraton hotels and Caesars Palace in Las Vegas--in hopes of merging the two companies’ gambling and hotel operations. Hilton lost the takeover fight to rival suitor Starwood Lodging Trust.

Two years ago, Bollenbach said Hilton was interested only in keeping the company intact, claiming that the hotel and gambling operations were more valuable under one corporate owner. On Tuesday, however, Bollenbach demonstrated that he had lost interest in keeping the company together.


The split “will allow each of the companies to grow faster separately than when they were joined together,” he said in a telephone news conference. “This is a good deal for us.”

Under a two-step plan, Hilton stockholders will get shares in the newly independent casino gaming company--which would rank as the world’s largest gambling firm--in a tax-free distribution, according to Hilton officials. Arthur Goldberg, who now heads Hilton’s gambling division, would become president and chief executive of the casino-gambling business.

After the split, the new gaming company would merge with the Mississippi gaming operations of Grand Casinos in a $1.2-billion deal, which would include the assumption of $550 million in Grand Casinos debt. Hilton shareholders would end up owning 86.4% of the new gambling concern, with the remainder owned by Grand Casinos stockholders. Grand Casinos’ operations in Mississippi--the nation’s largest gambling market after Las Vegas and Atlantic City, N.J.--include three of the state’s largest casino resorts in the cities of Tunica, Gulfport and Biloxi.

The spinoff and merger should be complete by the end of the year, according to Bollenbach.


Industry analysts applauded the split as well as the merger with Grand Casinos, which would give Hilton’s gambling business entree into the fast-growing Mississippi gambling market. It would also allow shareholders to choose between investing in the hotel or the gambling businesses.

“It gives shareholders the choice and works toward unleashing the value of each of the respective businesses,” said Jason Ader, a securities analyst at Bear, Stearns & Co.

But many Hilton investors were apparently expecting a far bigger deal--and greater returns--than the one announced Tuesday. On Wall Street, Hilton shares fell $2.88 to $28.63--which is 20% below its 52-week high--on the New York Stock Exchange. Grand Casinos, which also trades on the NYSE, lost $1.50 to $17 after trading as high as $19.13 early in the day.

Some investors and analysts had been counting on Hilton to announce the sale of its domestic hotel operations to Ladbroke, which owns and operates the Hilton International chain in foreign markets. Only a few months ago, Hilton tried and failed to combine its gambling operations with those of industry giant Circus Circus. But except for the Grand Casinos merger, Hilton officials said they expect to make no major hotel or gambling acquisitions for the time being.


“Obviously, there were no indications that there are any hot tickets to be punched in the near term,” said Rohs of Schroder & Co.

In addition, there were concerns that Grand Casinos’ Mississippi gambling resorts will face intense competition after Mirage Resorts opens up a giant hotel-casino complex on the state’s Gulf Coast.