Thursday, June 4, 1998 | 10:33 a.m.
Hilton Hotels Corp. and Grand Casinos Inc. have resumed merger talks, paving the way for a possible split of Hilton into separate gaming and lodging companies.
Neither company would comment on the status of the negotiations, which have heated up again following a hiatus prompted by the sale of 24 million Hilton shares in April from a charitable trust controlled by Chairman Barron Hilton. The trust received an estimated $770 million from the transaction.
To avoid any regulatory or legal challenges, Hilton executives had put talks with Grand and other potential merger candidates on the back burner until the Securities and Exchange Commission cleared the stock sale.
But now, sources say, Hilton is renewing efforts to structure a friendly acquisition that would further the company's growth strategy with a deal that's immediately accretive to earnings and could simplify investors' attempts to evaluate the performance of its two core businesses.
Hilton President Stephen Bollenbach has been eager to consummate a deal that would allow a split of the gaming and lodging businesses because he believes the resulting separately traded stocks would receive higher valuations from investors.
Hilton stock closed Wednesday $30.75 a share, down 31.25 cents, on volume of 1.7 million shares. With about 252 million shares outstanding, the closing price gives Hilton an equity market capitalization of $7.75 billion, or about 6.25 times estimated 1998 earnings before interest, taxes, depreciation and amortization (EBITDA).
Lodging stocks have recently traded at higher EBITDA, or cash-flow, multiples than pure gaming companies, which face increasing competitive pressures and limited domestic growth opportunities.
Analysts say Hilton's lodging arm should generate about $750 million of cash flow next year. At a "reasonable" lodging multiple of 10, they say, the hotel business alone would be worth about $7.5 billion.
Hilton's gaming division should generate about $650 million of EBITDA in 1999, the analysts say. A "reasonable" multiple for a large-cap gaming company would be 8.5, creating about $5.5 billion of equity value.
The $13 billion total valuation, less about $3.2 billion in debt and corporate expenses, would result in an equity value for Hilton of about $9.8 billion, or about $38.90 a share -- about 26.5 percent above the current price.
An acquisition of Grand -- which owns three resorts in Mississippi, including the two largest currently operating on the Gulf Coast -- would give Hilton a presence in the three top casino markets in the country. It already owns big hotel-casinos in Las Vegas and Atlantic City.
Grand's wholly owned Grand Casino Biloxi and Grand Casino Gulfport currently command the lion's share of the Gulf Coast market, and its Grand Casino Tunica is the largest casino between Las Vegas and Atlantic City.
Grand also manages three Indian casinos, including two in Louisiana.
Analysts say Grand could fetch $20 to $22 a share, a 14 percent to 26 percent premium over its recent trading price in the $17.50 range. Grand stock closed Wednesday at $17.1875 a share, down 6.25 cents, on lighter-than-normal volume.
The lower estimate gives a 7.5 multiple to a conservative projection of $150 million in cash flow from Grand's wholly owned casinos.
The analysts say Grand's management contracts with the Indian casinos are worth about $2.50 a share, and they tack on another $1 per share for about 10 acres Grand owns on the Las Vegas Strip next to the Polo Towers.
At the end of the first quarter, Grand had about $220 million in cash.
The $20 to $22 per-share prices would value the equity portion of the deal at $844 million to $928 million. Assumption of about $450 million of Grand's net debt would raise the transaction's total value to $1.3 billion to $1.3 billion.
Some analysts believe the spring 1999 opening of Mirage Resorts Inc.'s Beau Rivage in Biloxi will draw business away from Grand's Biloxi and Gulfport properties. Others, however, believe Beau Rivage will generate increased business in that marketplace, which would benefit Grand Casino Biloxi and a handful of other operations.
Hilton has previously indicated it wanted to assess the impact of Beau Rivage before negotiating a potential merger with Grand.
But if Hilton believes Grand will benefit from Beau Rivage, the combination of Grand's current low stock-market valuation -- it's trading at less than five times estimated non-Indian cash flow -- and its strong first-quarter performance may provide a strong incentive to cut a deal sooner rather than later.
Separately, Lady Luck Gaming Corp. of Las Vegas said today it reached a definitive agreement to sell its Lady Luck Biloxi casino to Grand for $15 million cash. Grand plans to close the casino, which competes with a Grand property.
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