Opposition to Hilton-Grand merger fading

Institutional holders are warming up to the split of Hilton Hotels Corp. into separate gaming and lodging companies and the subsequent merger of the gaming spinoff with Grand Casinos Inc., analysts said.

Executives from the two companies began a "road show" last week to explain the multi-faceted deal to big shareholders, some of whom had expressed concerns over the drop in stock prices since the deal was announced a few months ago.

"They're coming to believe in the deal," said one Wall Street gaming analyst familiar with the presentations.

"The road show is going well, and it looks like smooth sailing for the merger," a second analyst said.

Hilton and Grand plan separate shareholder votes in late November, with insiders of both companies committed to approving the transactions. The road show, consisting of visits by company executives to major outside shareholders, is designed to answer lingering questions about the deal.

The transactions call for Hilton to spin off its gaming business into a new publicly traded company called Park Place Entertainment Corp., which would be headquartered in Las Vegas.

Hilton President Steve Bollenbach would be Park Place chairman, with Arthur Goldberg, now head of Hilton's gaming division, the new company's president and chief executive officer.

Park Place would then acquire Grand Casino's three wholly owned Mississippi casinos, with Grand shareholders receiving one share of Park Place stock for each Grand share held.

Grand's three Indian casino-management contracts in Louisiana and Minnesota, along with other assets including a small parcel of land at the Polo Plaza on the Las Vegas Strip, would be spun off to Grand's current shareholders as a new publicly traded company called Lakes Gaming Inc.

According to gaming analysts familiar with the road show presentations, the companies are telling investors Grand's future is limited unless the merger is consummated.

Alone, Grand faces the prospect of losing existing Indian contracts over the next few years, no major growth opportunities and limited access to capital. Its major assets would be concentrated in Mississippi and face competition from other casinos, including Mirage Resorts Inc.'s Beau Rivage, which will open next year.

A merger with Park Place would create a large, diversified gaming company with stronger management and assets divided among the country's top three markets -- Las Vegas, Atlantic City and Mississippi.

The consolidation also would provide access to capital at up to three points below Grand's borrowing costs and significant cost savings. The merger should afford shareholders a premium relative stock market valuation, since large-cap gaming companies are trading at a multiple averaging 6.5 times cash flow, but small-cap companies are trading at a multiple of about five.

In a prospectus filed with the Securities & Exchange Commission, the companies said Hilton's board believes the split "will afford each of the lodging and gaming businesses greater flexibility to pursue business opportunities, including acquisitions, joint ventures or business combinations."

The filing said Park Place will have 18 properties throughout the United States and in Uruguay and Australia by 1999 after the opening of Paris-Las Vegas, its $760 million Strip hotel-casino.

The exact exchange ratio of stock Grand's shareholders will receive in Park Place will be based on the debt each company has at the time of the merger. It's expected Grand shareholders will get just under one share of Park Place stock and will wind up owning about 16 percent of that company.

Hilton and Park Place will split Hilton's and Grand's outstanding debt, which combined total about $4.33 billion. Park Place will negotiate a new bank credit facility and make a tender offer for some of Grand's existing debt to cut interest expenses.

If the Park Place-Grand merger isn't completed, Grand may be liable for a $30 million termination fee payable to Hilton.

Hilton's shareholder vote is scheduled for Nov. 24 in Beverly Hills, while Grand's is set for the same day in Plymouth, Minn.

archive