Hilton Hotels Corp. said Thursday that it would acquire Bally Entertainment Corp. in a $3-billion deal that would make Hilton the nation's largest gaming company in a rapidly consolidating industry.
The deal, the largest ever in the gaming industry, finally extends the reach of Beverly Hills-based Hilton to Atlantic City, N.J., the nation's second-largest gambling market and where Bally's Park Place is the most profitable casino, analysts say.
The deal is the first big splash by new Hilton Chief Executive Stephen Bollenbach, whom Hilton hired away from Walt Disney Co. four months ago to replace Barron Hilton, the son of founder Conrad Hilton. Before joining Hilton, Bollenbach had worked in the gaming industry as an executive with Trump Organization.
Hilton operates 10 casinos worldwide, the largest being the Flamingo Hilton Hotel and Las Vegas Hilton Hotel in Las Vegas. Among the remaining ones are three others in Nevada--two in Reno and one in Laughlin--plus gaming houses in New Orleans; Windsor, Canada; Istanbul, Turkey; and two in Australia.
Hilton, which also operates 240 other hotels, had $1.6 billion in revenue last year, half of which came from its gambling operations.
Chicago-based Bally has five casinos, including two in Atlantic City, one in Las Vegas, one near New Orleans and another in Robinsonville, Miss. It earned $66.1 million last year on revenue of $1.02 billion.
Hilton has been trying for years to crack the Atlantic City market and lost a bitter struggle for a license 10 years ago when New Jersey authorities turned down its application. The state's regulatory authorities later reversed themselves and said Hilton would be welcome to operate a casino in Atlantic City.
"Atlantic City has been a goal of ours and now we are not only in but present in a big way in a great Boardwalk location with more square footage than anyone except the Trump Organization," Bollenbach told reporters at a New York City news conference. "Our key objective is to be the largest in the gaming industry."
The planned merger comes only months after Hilton executives publicly floated the idea of splitting off its hotel operations from its casinos into separate entities. But Bollenbach said he is now convinced that the two operations go well together.
Gaming analysts such as Joseph Coccimiglio of Dean Witter Reynolds praised the deal as good for shareholders because of
cost savings and the potential for growth. The combined company expects to save about $35 million in computer, administrative and site development costs, but no massive layoffs will result.
More important, Hilton would immediately have two large casinos in Atlantic City instead of waiting three to four years to build a complex from scratch, said gaming and hotel analyst Joseph J. Doyle at Smith Barney & Co.
"It is the most attractive part of the acquisition," Doyle said.
The proposed merger tops ITT Corp.'s purchase of Caesars World for $1.7 billion in January 1995--but it will hardly be the last gaming industry deal, as more companies seek to create nationwide marketing and reservations systems in addition to financial clout to compensate for the slowdown in new gambling licenses after a decade of growth.
Since 1978, nine states have joined Nevada in legalizing gambling, a trend that, combined with the many Indian tribes' opening casinos, created golden opportunities for gaming companies.
But analysts said there has been a backlash of voter sentiment against gaming in many states, especially in states such as Texas and Florida where proponents had hoped for new enabling laws. Openings of several Indian casinos have been blocked by court action, said William N. Thompson, professor of public administration at University of Nevada, Las Vegas.
As a result, gambling companies have to buy other companies if they are to grow, Bollenbach said at the news conference.
In a later interview, Bollenbach said his company is still in merger discussions with the Ladbroke Group, which owns the rights to the Hilton name outside the United States. Hilton is also interested in acquiring Harrah's Jazz casino in New Orleans, now in bankruptcy proceedings.
The purchase price is also an affirmation of the job performed by Arthur Goldberg, Bally's chief executive and 10% shareholder, who restructured the company, refinanced its debt and sold Bally's money-losing health-spa chain.
Bally shares closed Thursday at $27.625 in New York Stock Exchange trading, up $1.50. Shortly after Goldberg took over the company five years ago, Bally's shares were selling for less than $3.
Hilton shares initially soared on the news, reaching $119.25, but closed at $113.75, off 75 cents. Most other gaming stocks closed lower or just marginally up.
The deal involves $2 billion worth of Hilton stock to be swapped for outstanding Bally's shares and Hilton's assumption of $1 billion in Bally debt. The deal is scheduled to close by the end of this year.
The sale ends months of speculation about a possible takeover of Bally. ITT had also been in talks with Bally about a possible merger, sources said Thursday. Bally sold its slot machine manufacturing business years ago and is now totally a casino concern.
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A look at the top 10 gaming companies in the U.S., ranked by "casino win:"*
1995 casino win, Rank Company in billions 1 Hilton/Bally** $1.4 2 Harrah's 1.3 3 Caesars/ITT 1.2 4 Trump 1.1 5 Mirage Resorts 0.783 6 Circus Circus 0.769 7 Boyd Group 0.501 8 Hollywood Casinos 0.499 9 Aztar 0.469 10 MGM Grand 0.405
* Casino win is the amount casinos have left over after paying winning bettors
** After proposed merger
Source: Sutro & Co.