Hilton Eyes Promus and Its 1,400 Hotels : Lodging: The two companies confirm they're discussing a merger. A deal would be worth close to $3 billion.

By JAMES F. PELTZ

Sept. 2, 1999 12 AM PT

TIMES STAFF WRITER

Hilton Hotels Corp., looking to complement its roster of upscale properties with a diversified group of moderately priced inns, said Wednesday it is in talks to acquire Promus Hotel Corp. in a deal that would be valued at close to $3 billion.

Promus operates and franchises about 1,400 hotels under such brands as Doubletree, Embassy Suites, Hampton Inn and Red Lion. Both companies confirmed they’re in negotiations but declined further comment until any merger agreement is reached.

For Beverly Hills-based Hilton, which runs about 270 mostly luxury and high-end hotels, the purchase of Promus would give the company needed diversity in the hotel marketplace and help buffer Hilton’s performance from economic downturns, analysts said.

“It would give Hilton a lot of growth avenues which it doesn’t currently have,” said analyst Jonathan Litt of PaineWebber Inc. in New York. “It gives them more brands to grow in more markets.”

The merger also “would provide Hilton with more of a stable earnings stream,” even though Promus’ properties would expose Hilton to considerably more price competition than it has faced in the past, said analyst Steven Altman of Duff & Phelps Credit Rating Co. in Chicago.

The deal would be Hilton’s largest lodging purchases since the company, under the direction of Chief Executive Stephen Bollenbach, spun off its massive casino-gambling operations into a separate company, Park Place Entertainment Inc., last December.

It also would mark a modest strategic shift for Hilton, which has mostly focused on building the Hilton brand name. “Adding these other brand names” to the Hilton empire “is more of a Marriott approach,” Altman said.

A Hilton-Promus marriage also would extend an overall trend of consolidation in the hotel industry in recent years, in which operators have been acquiring properties both to increase their growth and efficiencies and to broaden their reach into different price segments of the market.

Promus, based in Memphis, Tenn., itself is the result of a late-1997 merger between Promus and Doubletree Corp. That same year, Hilton was thwarted in its bid to acquire ITT Corp., then the owner of Sheraton hotels. ITT ultimately was bought by Starwood Hotels & Resorts Worldwide Inc.

“The reservations systems are costly, the frequent-guest promotional programs are costly, and so the more rooms you have in your system, the more economies of scale you get,” Litt said.

Hilton also would be getting Promus--a chain that it has considered buying for a number of years--at a time when Promus is available at a big discount.

Promus’ stock price has plunged 45% since March 1998, owing to problems with the Promus-Doubletree merger and industrywide softness in the mid- to low-end of the hotel industry, where overbuilding and severe competition have led to weak prices and eroding profits.

Indeed, Promus on May 25 scaled back its 1999 earnings projections because of weakening market conditions and operating troubles at its Doubletree and Red Lion chains.

However, Promus’ stock surged $2.94 a share on Wednesday to $32 after the companies disclosed their talks. That gives Promus an overall market value of $2.5 billion. With Hilton likely to offer a premium above market, that would place a merger’s value closer to $3 billion. Meanwhile, Hilton’s stock fell 56 cents to $11.69 a share. Both trade on the New York Stock Exchange.

Hilton, with revenue last year of $1.77 billion, owns such well-known properties as the Beverly Hilton in Beverly Hills, the Waldorf-Astoria in New York and the Hilton Hawaiian Village in Honolulu. Promus’ revenue in 1998 was $1.11 billion.

Hilton, too, has struggled to boost a lagging stock price; its shares have tumbled 40% over the last two years. Recently, the company has struggled with softness in Hawaii and some other key markets that have left Hilton with single-digit earnings growth through the first six months of this year.

The lackluster stock and financial results have dented Bollenbach’s reputation as a deft corporate strategist, which he earned in the mid-1990s by engineering a major comeback at the company. But Bollenbach has said that, with its gaming operations divested, Hilton can now focus on building its core hotel operations.

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Possible Partners

Beverly Hills-based Hilton Hotels Corp. says it’s in talks to acquire Promus Hotel Corp. in a deal valued at close to $3 billion. A brief profile of the two companies:

Hilton Hotels Corp.

Headquarters: Beverly Hills

Chief executive: Stephen F. Bollenbach

1998 revenue: $1.77 billion

1998 net income: $298 million

Employees: About 45,000

Operations: About 270 hotels worldwide, with brands such as Hilton Hotels, Hilton Garden Inn and Conrad International Hotels.

Promus Hotel Corp.

Headquarters: Memphis, Tenn.

Chief executive: Norman Blake Jr.

1998 revenue: $1.11 billion

1998 net income: $154 million