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Shareholders Sleep Better as Hilton Bounces Back

Lodging: The company's share price has regained much of its lost ground since last year's merger with Promus.


The corporate marriage of Hilton Hotels Corp. and Promus Hotel Corp. seemed a perfect match to Hilton Chairman Stephen Bollenbach. But for many Hilton shareholders, last year's merger resembled a doomed relationship.

The stock of Beverly Hills-based Hilton sank in the months following the approximately $3-billion merger. The deal piled nearly $1 billion more debt on the company and diluted earnings per share last year. Some analysts argued that Bollenbach had overpaid and that it would take years for the deal to pay off.

But today, no one is challenging Bollenbach's matchmaking skills. Hilton's share price has regained much of its lost ground as the merger with Promus--owner of Embassy Suites, Doubletree hotels and Hampton Inns--has exceeded expectations. Hilton now boasts more than 1,700 hotels around the world and can hold its own against Marriott Corp. and Starwood Hotels & Resorts Worldwide Inc., which once dominated the industry.

Hilton has used its sizable sales force and popular frequent-guest rewards program--Hilton HHonors--to boost the results of the former Promus properties. The company is now able to pitch an Embassy Suites or a Hampton Inn in areas where it lacked a presence or where the local Hilton is booked or too pricey for a budget-minded customer. In Los Angeles County, for example, the company can now funnel customers to 32 properties--including Doubletree, Embassy Suites, Hampton Inn, Red Lion Hotels and Hilton--as contrasted with the 13 before the merger.

"People were just a little bit miffed at their performance in general," said BankAmerica Securities analyst J. Cogan. But the recent improvement is "starting to bring people back to the stock."

Since bottoming out in early March at below $7 a share, Hilton stock has surged nearly 70%. On Monday, Hilton shares closed at $10.88, up 31 cents.

The stock's turnaround is a vindication for Bollenbach, whose reputation as a stellar corporate strategist took a beating when he lost a long and costly battle in 1997 to acquire ITT Corp., owner of the Sheraton hotels. Upstart Starwood emerged as the successful suitor.

"I got over it a . . . long time ago," Bollenbach said of the failed takeover. "Now that we are strategically complete, we have everything we need to be a competitor in this business."

Bollenbach could not have set his sights on a company more different from his own than Memphis-based Promus. Unlike Hilton, which had been dominated by its full-service urban hotels and run by a stable management team, Promus earned much of its income franchising and managing a vast collection of "brands" that ranged from budget Hampton Inn to business-class Doubletree. The company's top executives and board members were engaged in a long feud over strategy.

"They were totally dysfunctional," said Bollenbach, who had served as senior vice president at Promus and its predecessor company in the late 1980s. It was "like a wrestling match."

Despite the management turmoil, Promus featured a well-regarded franchise operation that catered to a variety of travelers. So Hilton took advantage of Promus' depressed stock price and made its move. The merger was unveiled in September 1999 and wrapped by year's end.

In addition to giving Hilton more bulk, the merger dramatically expanded the company's breadth. Hilton had derived most of its earnings from company-owned landmark properties in major urban centers, such as New York's Waldorf-Astoria and the nearly 2,000-room Hilton San Francisco & Towers.

The company now features a much larger and more diverse stable of properties that range from the luxury international hotels to budget roadside establishments.

"We had the best-known brand in the hotel business, but we lacked distribution," said Hilton Chief Financial Officer Matt Hart. "If we were sold out, all we could say is, 'Thanks for calling the San Francisco Hilton.' Now we can say, 'I'm sorry we are sold out, but would you be interested in a room at the Doubletree or Embassy Suites?' "

That kind of cross-selling has generated an additional $250,000 a day in revenue, according to Hart.

Hilton's various brands also appeal to franchisees and licensees who can't afford to build a high-rise Hilton but can open a suburban Hampton Inn. Most of Hilton's new properties--about 400 in the next two years--will operate under the names of former Promus properties, primarily Hampton Inn. In the long run, Hilton may earn as much from licensing and managing properties as it does from the hotels it owns.

"It's a nice, stable stream of income," Bollenbach said.

But not all the new brands Hilton inherited from Promus have performed as well as expected or seem to fit into its strategy. Red Lion, primarily a motel chain, generates a tiny fraction of the company's earnings and is excluded from the Hilton HHonors program. Hilton executives say they are continuing to study what role Red Lion will play in the long run.

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