Analysts Wonder: Who Will Hilton Court Next?

Hilton Hotels Corp. on Monday confirmed that it has broken off merger negotiations with rival Circus Circus Enterprises Inc., leaving industry analysts wondering what new partner Hilton will pursue.

The Beverly Hills-based company issued a terse statement saying that “discussions have been terminated” regarding a potential deal with Circus Circus. Hilton had been looking at breaking up its gambling and hotel operations into separate, independent companies, with Las Vegas-based Circus Circus merging into Hilton’s stand-alone gaming company.

But the negotiations broke down over a wide range of issues, including Hilton’s half-interest in a Detroit-area casino. That ownership stake would have forced Circus Circus to scrap plans to build its own casino in the area if the two companies had merged, according to sources familiar with the talks.

“There were a number of issues that came up that brought us to the realization that [the merger] was something we could not complete,” Hilton spokesman Marc Grossman said.

The failure to reach an agreement disappointed Wall Street: Circus Circus shares tumbled $3 to close at $21.75 and Hilton lost 75 cents to close at $32.88. Both trade on the New York Stock Exchange.

Although the talks with Circus Circus are over, Hilton did not rule out a breakup of the company. “We are continuing to look at any and all alternatives for creating shareholder value,” Grossman said.

Hilton has been struggling to find ways to boost its lagging stock price in the wake of its failure to acquire ITT Corp., which owns the Sheraton hotels and Caesars Palace in Las Vegas, after a nasty takeover fight last year. Hilton lost out to rival bidder Starwood Hotels & Resorts Worldwide Inc.

The stellar performance of Hilton’s hotel operations and the company’s stock price have in part been undermined by the lackluster gaming division, industry analysts say.

“What [Hilton] has been saying is that Wall Street is punishing Hilton for not splitting the company apart,” said Marvin Roffman, president of Roffman Miller Associates, a Philadelphia-based money management firm.

Roffman and other observers say Hilton will probably now focus on a potential deal with Ladbroke Group, the British gaming and hotel giant that owns the Hilton International chain.

After losing its bid to buy Sheraton, a combination with Ladbroke is one of the few opportunities Hilton has to team up with a major, international player in the hotel and gaming business. Ladbroke in particular would help shore up Hilton’s lack of a substantial network of international hotels, said Harold Vogel, a hotel and gaming analyst at Cowan & Co.

The failure to take over ITT “forces them into things that are a little riskier or less strategically valuable,” Vogel said. “I don’t think any of us . . . including Hilton management, can predict what the structure of Hilton will be a year from now.”