Hilton Exec Still Enjoys City Shopping
The holidays are long gone, but Hilton Hotels Corp. President Stephen Bollenbach is still in a shopping mood.
His budget? Between $500 million and $700 million. What’s on his list? Big-city and airport hotels.
Bollenbach’s buying binge comes as Beverly Hills-based Hilton adjusts to life without its massive casino-gambling operations, which were spun off at the beginning of the year into a separate company, Park Place Entertainment Inc. Without the gambling business to worry about, Hilton can now focus on expanding its hotel operations--which remain smaller than those of some key rivals--by gobbling up large properties in dense urban areas.
Despite a slowdown in the hotel trade, Bollenbach said he has no regrets leaving the gambling industry behind.
“It’s a hard business,” said Bollenbach of running casinos. “It’s a labor-intensive business. It’s a capital-intensive business. I think we ought to stick to our knitting in the hotel business.”
Bollenbach is now pitching the newly reorganized Hilton to Wall Street, where the 56-year-old’s reputation for boosting shareholder value and engineering complex deals has suffered recently. In November 1997, Bollenbach lost a bitter and costly 10-month battle to take over ITT Corp., then the owner of Sheraton hotels and of Caesars Palace in Las Vegas. Hilton was outbid by Starwood Lodging Trust, which won with a $10-billion offer.
Last summer, in an attempt to boost Hilton’s lagging stock, Hilton announced the spinoff of its gaming operations, which then were to be merged with a Mississippi riverboat casino operator. But the deal disappointed investors, many of whom had expected to see a bigger deal, such as a merger with London-based Ladbroke, which operates Hilton hotels in foreign markets. Hilton shares plunged nearly 10% on the day of the announcement.
“I thought [the stock] would go up,” said Bollenbach, who remains disappointed with Hilton’s share price, although it has risen somewhat since the spinoff was completed.
Many industry analysts and investors have applauded the jettisoning of the company’s gambling operations, now headquartered in Las Vegas and headed by Arthur Goldberg, Hilton’s former gaming chief.
After a burst of growth and profitability in the early 1990s, the gambling business has turned sluggish, with the major operators in gambling mecca Las Vegas forced to invest huge sums in new resorts just to stay even.
The disappointing results of Hilton’s gambling operations--the world’s largest--masked the stellar performance of its hotel group, which staged a dramatic comeback in the middle of the decade as business and tourist travel soared.
Hilton’s gambling operations were also the source of some embarrassing episodes that tarnished Hilton’s blue-chip image. In the mid-1980s, New Jersey gaming regulators turned down Hilton’s application for a casino license because of the company’s ties to a lawyer suspected of links to organized crime. New Jersey officials reversed themselves in 1991.
Many hotel investors were unhappy that huge sums were being invested to acquire casinos to keep Hilton on top as the industry was undergoing a shakeout. In addition, many potential individual and institutional investors will avoid buying stocks of companies involved in “sin” industries.
Spinning off the casinos “allows investors that had a prohibition against owning gaming stocks to buy Hilton,” said Joseph V. Coccimiglio, a hotel and gaming analyst with Prudential Securities. “That’s a plus.”
Bollenbach serves as chairman of Park Place Entertainment, but he is primarily focused on capitalizing on the Hilton name by leading a hotel-property buying spree that totaled nearly $1 billion last year. The binge will continue this year, said Bollenbach, whose company can tap into a $1.7-billion line of credit to finance any purchases.
In addition, the company is expanding its chain of no-frills Hilton Garden Inns--which are expected to number 200 next year--and its time-share operations, the smallest but fastest-growing part of the company. Hilton is also experimenting with the idea of a franchise chain of extended-stay hotels. The first of these is being built near Los Angeles International Airport to test the format.
The recent expansions notwithstanding, Hilton remains smaller than such key rivals as Sheraton and Marriott. Furthermore, the bulk of Hilton’s earnings come from only 10 hotels, all of which it owns and operates, in six cities. These include the San Francisco Hilton & Towers, Hilton Hawaiian Village in Honolulu and the landmark Waldorf-Astoria in New York.
That kind of concentration “creates more risk and makes them a little bit more cyclical” and sensitive to economic ups and downs, said Steven P. Altman, a gaming and lodging analyst at Duff & Phelps.
Amid signs that the nation’s economy is slowing down, investors have become concerned about the hotel industry’s prospects, depressing those companies’ stock prices. At current levels, Hilton shares--which closed Thursday up 19 cents at $15.44 on the New York Stock Exchange--are priced as if a recession were going to trigger a drop in company revenue and profit in the coming months, Bollenbach said.
But Bollenbach and many industry analysts don’t see a recession ahead. Rather than drop, Bollenbach said, he expects Hilton revenue to continue growing in 1999--albeit at a slower rate than last year. Hotel room revenue from properties at least 1 year old should increase 4% to 5%, versus last year’s 7% to 8% increase, he said.
The slowing, he said, “means that the waiting line at the Waldorf-Astoria, instead of being a mile long, is half a mile long.”
Bollenbach’s confidence stems from the fact that its 10 most profitable hotels are established in built-up urban locales, where developing a major full-service property can cost $100 million and take years to complete. As a result, Hilton has more leeway to raise rates. It also means the company has less to fear from the price cutting and falling occupancies of suburban locales, where new hotel construction has picked up substantially, industry analysts say.
“If you are looking for a [hotel] industry poster boy of where you and your product should be in 1999, Hilton would be that poster boy,” said lodging industry analyst John J. Rohs at Schroder & Co.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Checked Progress
Although it has made some recent gains, Hilton Hotels Corp. stock remains depressed because of unjustified recession fears, Hilton President Stephen R. Bollenbach says. Monthly closes and latest:
Thursday, 1999: $15.33, up 19 cents
Source: Bloomberg News
