Hilton to Go Global, Unify Brand Name

Hilton Hotels Corp., unveiling its long-awaited deal Thursday for the hotels of Britain’s Hilton Group, is making the equivalent of a $5.7-billion international room reservation to better compete against larger lodging rivals.

With the deal, the Beverly Hills-based hotel chain plans to expand the Hilton name overseas and take some of its lesser-known brands such as Hampton Inn to new markets around the world, executives said.

“The big theme here is the reuniting of a company that always belonged together,” Hilton Hotels Corp. Chief Executive Stephen F. Bollenbach said in an interview about the business that split in 1964 to free the European subsidiary from debt restrictions on the parent company. “We have been patient and we waited until the right elements were in place to do a deal.”

Credit-rating companies warned that borrowing $4.61 billion for the proposed purchase could bring a reduction in Hilton’s debt ratings. Otherwise, Wall Street largely endorsed the transaction, which the two companies had been negotiating for months. Several analysts called it a smart move that would transform Hilton into a global competitor, and investors responded by pushing Hilton’s stock higher.

“The hit against Hilton was that they have always been a one-trick pony largely confined to the domestic market,” said Jeffrey M. Randall, a Missouri-based analyst for A.G. Edwards & Sons. “Their backyard just went from being the U.S., Canada and Mexico to the world.”

Hilton shares rose $1.70, or 8%, to $24.

For the 63-year-old Bollenbach, who took Hilton’s helm nine years ago, the proposed purchase is the culmination of a growth strategy through acquisition that would put Hilton properties in 80 countries. The deal would raise the number of hotel rooms to 472,000 from 370,000 and more than double the number of employees to 130,000 from 60,000.

The purchase of its British namesake’s hotel assets would put Hilton, the third-largest U.S. hotel company after Marriott International Inc. and Starwood Hotels & Resorts Worldwide Inc., on a par with Marriott in terms of the number of hotel rooms, Hilton executives said. But the combination, which is expected to post about $8 billion in 2006 revenue, would lag behind Marriott’s more than $10 billion in sales.

Although Hilton would be adding hotels, it also would be shedding some -- a common strategy in the hotel industry known as “asset light,” in which corporations sell properties but keep the lucrative fees that come from running them. Hilton said it planned to sell many of the new holdings and either manage or operate the hotels as franchises rather than continue owning the real estate.

Selling is possible “today because there is quite a demand for investment in real estate,” Bollenbach said. “Seven or eight years ago you could not do that because the prices people were willing to pay were too low.”

More than 70% of the combined holdings would be in the Americas, with 26% in Europe and Africa.

Company executives and analysts said Thursday that there was much opportunity to take some of Hilton’s middle-market brand names overseas, particularly in Asia, something that Marriott International has done with some success. The possibilities include pitching something like “Hampton Inn by Hilton” to the growing middle class in India, for example, where analysts said that the market for affordable but good-quality hotel rooms was wide open.

“There is already a lot of evidence of demand for mid-level hotel services in places like India and China,” said Smedes Rose, an analyst for Calyon Securities Inc. in New York. “A Hampton Inn by Hilton might resonate with the Chinese consumer as quality without being particularly expensive.”

The Hilton transaction comes in the midst of a hotel industry recovery from the disastrous effects of the 9/11 terrorist attacks on travel and tourism. Hilton, for example, posted a 46% rise in third-quarter profit this year to $89 million, or 22 cents a share. Although a considerable portion of that reflected real estate sales, Hilton was also able to raise room rates by an average of 8.9% at company-owned hotels in markets including New York and Hawaii as business and leisure travel rose.

Through the third quarter, Hilton reported revenue of $3.4 billion. Hilton Group, which releases financial results twice a year, posted $2.8 billion in revenue through June 30.

Hilton said it hoped to save $30 million a year after the combination, but added that layoffs would be minimal. U.S. and British regulators and shareholders of both companies must approve the deal before it could be completed, a process the two Hiltons expect to wrap up by the end of March.

After unloading the international hotels, Hilton Group would change its name to Ladbrokes and focus on its online and in-store betting operation, which has hundreds of locations in Europe.

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Before and after

Hilton Hotels hopes to expand its operations by acquiring the hotels of Britain’s Hilton Group. What Hilton Hotels would look like after the deal:

Number of hotels and resorts:

Before acquisition 2,300 / After acquisition 2,750

Number of rooms:

Before acquisition 370,000 / After acquisition 472,000

Countries serviced:

Before acquisition U.S., Canada, Mexico / After acquisition 80

Employees:

Before acquisition 60,000 / After acquisition 130,000

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Numbers are approximate.Source: Company reports