Hilton to Buy Promus for $3.04 Billion : Lodging: The cash-and-stock deal would create a giant with operations in nearly every part of the industry.

Hilton Hotels Corp. said Tuesday that it will buy Promus Hotel Corp. for $3.04 billion in cash and stock, in a deal that would create a colossus overseeing 1,700 hotels, 85,000 employees and operations in almost every segment of the industry.

The deal would give Beverly Hills-based Hilton such Promus brand names as Doubletree and Embassy Suites, substantially increased franchising operations, and expansion into limited-service lodging and all-suites hotels. Promus has 1,400 hotels and 40,000 employees. The total number of rooms would come to about 290,000 for the combined company.

The acquisition, which also would include $1 billion in debt and transaction costs, would put Hilton in more direct competition with leading hotel operators Starwood Hotels & Resorts Worldwide Inc. and Marriott International Inc., which are the two largest U.S. hotel companies.

“It’s a business combination that does two important things--one, it makes us big enough and essentially the same size as the other two big competitors--Marriott International and Starwood--and second, it allows us to combine a group of wonderful brands so we can cover almost every market niche in the hotel business,” Hilton President and Chief Executive Stephen Bollenbach said Tuesday.

Shares of Memphis-based Promus soared $3.44 to close at $34.81, but Hilton slumped 63 cents to close at $11.19, after hitting a new 1999 low of $11. Both trade on the New York Stock Exchange.

The combined company would have about $5.4 billion in debt at the end of 1999, as Hilton takes on about $900 million of Promus debt in the deal, although Promus plans some asset sales that could cut that figure to $800 million, a Hilton spokesman said.

Hilton agreed to pay $38.50 a share in cash for 55% of the shares and $38.50 a share in stock for the remaining 45%. It will also have about $200 million in transaction costs, bringing the total cost to about $4 billion.

The Promus acquisition would be Hilton’s most significant move since it spun off its gaming operations into Park Place Entertainment Corp. at the end of last year, reducing its size and making itself purely a hotel company.

The Promus deal, expected to close by the end of this year, will lower Hilton’s earnings per share by about 6% in 1999, Bollenbach said, though after adding back goodwill write-offs the deal would add to cash earnings shortly after it closes.

“Strategically the transaction makes all the sense in the world,” said Lehman Bros. analyst Joyce Minor. “The complementary brands will work well together, and it positions Hilton as one of the big three in the U.S.” But Hilton is paying too much for Promus, she said. Using estimates less optimistic than those Hilton cited, Minor said she expects the deal to cut earnings by more than the 6% Hilton said it expects.

Bollenbach said he projects that the deal will lead to $55 million in cost savings in the first year and $90 million a year thereafter, and that achieving those reductions may involve job cuts.

Bollenbach will lead the new company. Promus Chairman, President and Chief Executive Norman Blake Jr. will leave after assisting during the transition period, the executives told Reuters.

In a conference at New York’s Waldorf-Astoria, which is operated by Hilton, Bollenbach said he first approached Promus about a deal in mid-July. The talks went well, but Blake said he felt obligated to evaluate other possibilities before ultimately deciding that the Hilton deal had the best potential for shareholders.

The corporate headquarters will be in Beverly Hills, but the company will maintain significant operations in Memphis. All brands of both companies will be maintained, executives said.