Publish date:

Hilton Hotels to Acquire Most of Grand Casinos, Spin Off Gambling Operations

Hilton Hotels

(HLT) - Get Hilton Worldwide Holdings Inc (HLT) Report

will announce Tuesday morning that it will split its hotel and casino divisions and buy most of

Grand Casinos


in a complex, all-stock deal that will create the world's largest gambling company, according to sources with knowledge of the transaction.

The new casino company, with an expected valuation of more than $6 billion, including debt, will be a gambling powerhouse. The combined entity will have significant market share in Las Vegas, Atlantic City and Mississippi, the three most important U.S. casino markets. Together, Hilton/Grand will have well over $3 billion in gambling revenue in 1998, and some $700 million in cash flow, or earnings before interest, taxes, and depreciation and amortization charges.

Hilton's standalone hotel company will be almost as large, with nearly $3 billion in revenue and more than $600 million in cash flow this year.

The price Hilton is paying for Grand is difficult to calculate because of the deal's complex structure, but the deal apparently doesn't represent much of a premium to Grand's current price. The casinos Grand is contributing will produce more than one-fifth of the new company's revenues and cash flow this year. But Grand shareholders will apparently end up with just under 14% of the equity in the new casino company.

The companies project that the new combined casino company will be worth about $6.03 billion, including about $1.9 billion in debt. Grand shareholders will receive 13.6% of the equity in the company if that valuation projection holds, according to people familiar with the deal.

Hilton shareholders will have the remainder, as well as 100% of the hotel company. Grand shareholders will retain Grand's contracts to manage several native American casinos, which are worth a couple of dollars per Grand share. Those native American casinos are in Minnesota and Louisiana.

The relatively low valuation on Grand's assets reflects concerns from both Hilton and Grand about the impact of a new Gulf Coast casino from industry leader

Mirage Resorts


. Currently Grand holds a leading position in the Gulf Coast area, but the Mirage casino, the 1,800-room Beau Rivage, scheduled to open next year, is expected to cut into Grand's profits along the so-called Redneck Riviera.

The new casino company will be headquartered in Las Vegas and run by Arthur Goldberg, the head of Hilton's casino side, while the hotel company and most of Hilton's senior executives will remain at Hilton's headquarters in Beverly Hills, Calif.

Grand Chairman Lyle Berman will remain on the new casino company's board, and Grand President Tom Brosig will run the company's Midwest casinos, including the former Grand properties in Mississippi.

Spokespeople for both Grand and Hilton declined to discuss the possibility of a merger between the companies. Grand ended trading Monday at 18 1/2, down 1/16, while Hilton finished at 31 1/2, up 13/16.

Rumors of a possible Hilton-Grand deal have been swirling since


first broke the

news in March that the companies were talking. After talks slowed in May, apparently over price, the merger discussions recently heated up again. Hilton Chief Executive Officer Stephen Bollenbach has made no secret of his desire to split Hilton into casino and hotel companies, arguing that the two businesses don't have much synergy and that Wall Street's current dislike of casino companies is preventing Hilton's hotel division from getting the price-earnings and price-cash flow multiple he believes the hotels deserve.

TheStreet Recommends

Unfortunately for Bollenbach, the split comes just as the hotel market may have peaked, according to independent forecasters from

Coopers & Lybrand

. While room rates have continued to rise, occupancy levels have dropped slightly in some parts of the market, and investors in the sector have grown increasingly concerned about overbuilding, especially in the low- and mid-priced segments of the market.


Starwood Hotels & Resorts


, which won a bitter takeover battle with Hilton last year for control of


, owner of the higher-priced


chain, has recently seen its stock droop from 61 in the wake of the ITT deal to 47 today.

Marriott International

(MAR) - Get Marriott International, Inc. (MAR) Report

has also lost ground, falling from 38 in March to 31 today.

The Wall Street Journal

has reported that Bollenbach had a financial stake in splitting Hilton before June 30, because he has in-the-money options on 4.5 million Hilton shares that will vest immediately upon a change of control for the company. But a Hilton spokesman says Bollenbach has waived those provisions.

At one point, Hilton considered making a bid for

Circus Circus

(CIR) - Get CIRCOR International, Inc. Report

, the biggest casino company in Las Vegas, either instead of or in addition to its Grand acquisition. But Circus' continuing problems, and the more than 15,000 new hotel rooms which will open on the

Las Vegas Strip

in the next two years, have caused Hilton to scuttle that plan.