Hilton finally makes Grand acquisition

Hilton Hotels Corp. is buying Grand Casinos Inc.'s Mississippi gaming operations for about $1.2 billion and splitting into separate gaming and lodging companies.

The long-anticipated deal announced today contains one twist -- Grand's Indian casino management contracts, undeveloped land on the Las Vegas Strip and other non-Mississippi assets aren't included in the acquisition. They'll be spun off to Grand shareholders.

Hilton shareholders will receive one share of the new gaming entity -- which will include all of Hilton's current gaming properties plus three Grand casinos in Tunica, Gulfport and Biloxi, Miss. -- and retain their holdings in the Hilton lodging company.

Grand shareholders are expected to get a little less than one share of the new Hilton gaming entity for each Grand share, and retain their holdings in the Grand spinoff, which will be publicly traded.

The exact exchange ratio for Grand shareholders will be based on enterprise values of $1.2 billion for Grand Casinos, including assumption of about $550 million in debt, and $6.025 billion for the new Hilton gaming company.

Based on those values and the number of shares outstanding in each company, Grand shareholders would receive a total of about 13.6 percent of the stock in the new Hilton gaming company valued at a presumptive $12.38 to $16.09 per share.

"These are multiples of expected cash flow far in excess of what a company such as Circus Circus Enterprises Inc. commands," said Dave Ehlers of Las Vegas Investment Advisors Inc.

Circus stock was trading at $17 this morning, about 7.1 to 7.4 times estimated cash flow, he said, while the projected exchange ratio values the new Hilton gaming stock Grand shareholders will receive at nine to 11 times 1997 proforma cash flow.

"These calculations don't include the value of the Indian contracts or whatever other assets, including the Las Vegas acreage, that are to be included in the Grand Casino spinoff," Ehlers said.

Grand stock opened higher today, then dropped $1.25 to $17.25 in mid-morning trading.

"These transactions will create enormous value for our shareholders," Hilton President Steve Bollenbach said. He indicated that further gaming acquisitions are planned.

"The spinoff of the Hilton gaming operation puts us in the position to be the fastest-growing company this side of the Internet," he said.

"The gaming business today is just like the hotel business about four or five years ago. The stock market is looking with disfavor at the gaming sector now, which creates lots of buying opportunities that can be immediately accretive to earnings.

"We can make any acquisitions more valuable because of a cheaper cost of capital, strong management and reduced overhead," Bollenbach continued.

"Strategically, the Grand acquisition gives us the third major gaming market, adding Mississippi to Las Vegas and Atlantic City. And it adds to the objective not only geographically but also from a customer-stratification view, so we have less dependence on the high-roller business and a broader customer base."

Bollenbach said the protracted negotiations to acquire Grand, which began more than six months ago, included a close look at the expected impact of Beau Rivage, the new Mirage Resorts Inc. gaming property opening in Biloxi next spring. Some analysts believe Grand will lose its dominant position in the area, while others say Beau Rivage will benefit Grand by expanding the market.

"We factored into our purchase price the competition that will come from Beau Rivage," he said. "I think it will be a push for two years and then a positive for Grand. Beau Rivage is the best physical property there, but Grand has great hotels, operating experience and a loyal customer base. There's room for both of us there."

Bollenbach will become chairman of the new gaming company and retain his positions with Hilton Hotels.

Grand Chairman Lyle Berman will become a director of the new gaming company and Grand President Tom Brosig will take over its emerging market operations, which will include Mississippi, Louisiana and the Midwest.

Hilton Executive Vice President Arthur Goldberg will become president and a director of the new gaming company.

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