HILTON’S SPINOFF STRATEGY : Vegas Divorce : Hotels, Gambling to Be Separated; Company Shares Take a Dive

Apparently unable to find a buyer for the entire firm, Hilton Hotels Corp. on Thursday announced plans to split its hotel and casino gambling operations into independent companies, a move that sent Hilton shares tumbling on Wall Street.

Beverly Hills-based Hilton, which left investors fuming in 1989 after a similar effort to sell the company failed, was apparently too pricey a target for potential suitors, said industry analysts. The estimated cost of buying the company intact, with its approximately 240 hotels and casinos, exceeded $5 billion.

“It looks like nobody stepped up and put their chips on the table,” said Joyce Minor, a gaming and lodging industry analyst at Duff & Phelps, an investment research firm in Chicago.

In an announcement issued shortly before the annual shareholders meeting, Hilton said it would spin off the company’s casino gambling operations, which are concentrated in Las Vegas, into a separate, publicly traded company.

Details of the tax-free spinoff are to be presented to the Hilton board of directors next month. Hilton said the spinoff will allow the separate companies to focus on their respective businesses and give them greater freedom to expand.

“Each company will continue to be a world leader in its business,” Chairman Barron Hilton told shareholders assembled in a ballroom at the Beverly Hilton Hotel. “Each will be a large, financially strong company. And each will have talented and experienced management.

“After much study . . . the board has decided that now is an especially good time to separate our businesses,” said Hilton, who owns nearly 25% of the company founded by his father, the legendary Conrad Hilton.

Hilton, which hired investment banker Smith Barney in November to study various ways to boost shareholder value, also said that discussions with potential buyers for all or parts of the company “may continue.” British bookmaking and hotel operator Ladbroke Group, which owns and operates Hilton International hotels, has disclosed its interest in Hilton.

The spinoff announcement was clearly a letdown for Wall Street, which had bid up the price of Hilton shares by about 30% since last November. Many had speculated that Hilton could fetch $100 to $105 a share.

On the New York Stock Exchange, Hilton shares plunged $6.50 on Thursday to close at $71.25 on volume of 1.1 million shares.

“The market was assuming, incorrectly so, that the whole thing would be sold,” said gambling and entertainment analyst Harold Vogel at Cowen & Co., a New York-based investment banking firm. “The spinoff does not go as far as the market would like.”

The spinoff itself will not lead to a dramatic boost in Hilton’s shares. In fact, many analysts said that Hilton stock, even after the nearly 10% plunge it took Thursday, is still overvalued in comparison to other hotel and casino industry shares.

David Wolfe, a gambling industry analyst at New York-based Oppenheimer & Co., values Hilton at $66 a share, adding, “That’s why you got the dramatic selloff today.”

Ironically, Hilton’s difficulty in finding a suitor comes at a time when its performance has exceeded many expectations.

After a long slump, Hilton’s hotel division, which includes the famed Waldorf-Astoria in New York, has enjoyed rising occupancy and room rates. Meanwhile, Hilton’s gaming operations, which include nine casinos worldwide, saw profits erode in 1994, but they are expected to rebound this year.

Wolfe expects Hilton’s profits to grow 31% this year from 1994’s nearly $122 million. “They’re basically doing a good job,” he said of the company’s management.

Spinning off the gambling division from the hotels could be an intermediate step toward sale of either division, industry analysts say. The separation would make an acquisition more affordable, as well allowing bidders to focus on the part of the company they want, said analyst Minor at Duff & Phelps.

“The spinoff is not all that much of a big deal,” she said. But it does “make it easier to sell the two business separately.”

However, some analysts remain skeptical that Hilton will complete any deal--even the spinoff--given its failure to find a buyer in more than five years of on-again, off-again attempts to sell the chain.

In 1989, Hilton’s stock price reached $115.50 a share after the company put itself on the auction block and Japanese investors were paying top dollar for U.S. hotel and real estate property. But Hilton never struck a deal and prospects for a sale eventually faded as financial and real estate markets in the U.S. and Japan weakened.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

The Hilton Empire

Hilton Hotels plans to split its hotel and casino businesses--news that sent its stock plunging $6.50 a share Thursday. Investors had hoped for a sale of the entire gaming-lodging empire. A look at the company:

HOLDINGS

Hotels-resorts

The company owns or manages about 220 non-casino hotels, including some abroad under the Conrad International name. U.S. hotels include the Beverly Hilton, New York’s Waldorf-Astoria, Chicago Hilton & Towers and Hilton Hawaiian Village.

Casinos

The company owns five Nevada hotel-casinos, including two in Las Vegas (the Las Vegas Hilton and the Flamingo), two in Reno and one in Laughlin. It also owns a New Orleans riverboat casino and has interests in casinos in Canada, Australia and Turkey. Work is under way on casinos in Kansas City, Mo., and Uruguay.

STOCK PRICE

Weekly closings, except latest:

Thursday: $71.25, down $6.50

REVENUE SOURCES

1994 revenue, broken out by business segment (and actual amount, in millions): Rooms: $509.6 (33.8%) Food and beverage: $247.2 (16.4%) Casinos: $480.6 (31.9%) Management and franchise fees: $94.5 (6.3%) Other: $174.3 (11.6%)

REVENUE

In millions:

1994: $1,506.2

EARNINGS

In millions:

1994: $121.7

Sources: Bloomberg Business News, wire reports. Researched by DAVID NEIMAN and JENNIFER OLDHAM / Los Angeles Times