Investors fret over Grand-Hilton merger

Grand Casinos Inc. shareholders could reject the company's $1.2 billion agreement to sell its three Mississippi resorts to Hilton Hotels Corp.

Some large shareholders said they'd vote against the agreement if they had to make the decision today. And a Grand executive told Bear, Stearns & Co. casino analyst Jason Ader that the vote, expected to take place in November, now appears too close to call, Ader said.

Shares of Grand, the largest operator of casinos in Mississippi, have fallen 46 percent since June 30 when the agreement was announced. Investors are concerned that Hilton's and Grand's casinos will lose business to new properties in Mississippi and Las Vegas.

"If it was voted on today, my inclination would be to vote against it," said Tom Kolefas, senior portfolio manager at Loomis Sayles & Co., which held 726,350 Grand Casinos shares, or 1.7 percent of its shares outstanding, as of June.

Kolefas added that he could change his mind if he hears a more thorough explanation of how Hilton and Grand came to the $1.2 billion purchase price.

Shares of Hilton, one of the largest U.S. casino companies and third-largest hotel company, have fallen 33 percent since the agreement was announced.

Hilton plans to spin off its casinos from its hotels, separating its about 260 upscale hotel properties from the slumping gambling business. The Hilton casino company would then buy Grand's Mississippi resorts in Biloxi, Gulfport and Tunica for stock and debt valued by the companies at $1.2 billion, bringing Hilton for the first time into Mississippi, the third-largest casino market.

Investors, however, are unsure if stock they will receive from Hilton will really be worth the $650 million that the companies say it will.

It is stock in a new casino company and it is not yet known how that company will do in the face of new competition.

Mirage Resorts Inc.'s Beau Rivage resort in Biloxi is expected to take business from Grand's Gulf Coast properties. And Mirage's new Bellagio resort on the Las Vegas strip could take business from the Hilton's three Las Vegas resorts, the Las Vegas Hilton, the Flamingo Hilton and Bally's.

The new Venetian, Mandalay Bay and Aladdin also will compete with Hilton.

"You don't really know what you're getting," Bear, Stearns' Ader said of the new Hilton casino company. "It's uncertain where profits are going at the Las Vegas Hilton, the Flamingo Hilton and Bally's."

But given the state of the industry, and Grand's share price, other analysts don't think Grand has many alternatives.

"I don't think Grand is a whole lot better off independent," said David Wolfe, an analyst at CIBC Oppenheimer, in New York. "I think Grand has very few options by itself.

"I don't know what their alternatives are," agreed Dave Ehlers, chairman of Las Vegas Investment Advisors.

Hilton spokesman Marc Grossman said he expects Hilton's properties to hold their own in Las Vegas against the new properties and that Hilton's own new resort, the Paris, will be a success.

Mirage's new property in Mississippi, meanwhile, could bring more visitors to Mississippi, benefiting Grand's resorts, he said.

Grossman declined to comment on how Hilton and Grand came to the price they did except to say it was negotiated between the two companies.

Neither Wolfe nor Ehlers would be surprised if the companies were to renegotiate some terms of the deal.

Share of Grand, based in Minnetonka, Minn., fell 1/16 to 9 3/16 in early trading today. Beverly Hills, Calif.-based Hilton based rose 1/8 to 21 1/16.

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