Hilton Hotels Corp. yesterday agreed to buy Promus Hotel Corp. for $4 billion in cash, stock and assumed debt, giving the fifth-largest U.S. hotel company new inroads in the popular and competitive mid-scale segment of the lodging business.
Promus's hotel brands include, among others, Doubletree, Embassy Suites, Hampton Inn and Homewood Suites. With this acquisition, analysts said, Hilton will be able to better compete with industry leaders such as Marriott International Inc. and Starwood Hotels & Resorts Worldwide Inc., though some said Hilton may have overpaid and faces a rebuilding job at Promus.
Hilton, which specializes in luxury hotels, will pay cash for 55 percent of Promus's shares and exchange stock for the remainder in a deal valued at $38.50 a share, a 23 percent premium over Friday's closing price.
"I would have expected Hilton to pay $35 a share and not $38.50 a share," said Denise Warren, senior industry analyst at Merrill Lynch Global Securities.
According to Hilton, the post-merger company will have 1,670 hotels, compared with 1,649 for Marriott and 677 for Starwood. But Marriott will still lead the pack in number of rooms with 324,355. Hilton will have 289,586; Starwood (excluding its Caesars holdings) has 217,987.
"It is a transaction that immediately accomplishes our long-standing objectives of . . . leveraging our brands and growing our franchising, management and time-share businesses," said Stephen F. Bollenbach, Hilton's president and chief executive.
Still, Marriott--which operates the Renaissance, Courtyard and Residence Inn brands, among others--is perceived as a savvier company with an aggressive international outlook. "I don't see Marriott being impacted by the deal," said Harry Curtis, principal at BancBoston Robertson Stephens.
Analysts said Hilton faces some critical tests in making the deal work. Key among the concerns voiced by analysts were the need to reposition the troubled Doubletree brand, Promus's low return from its owned properties and the question of leadership at the merged company. Bollenbach "is a great finance man, but they need someone who can operate and supervise the combined company," Warren said.
Shares of Beverly Hills-based Hilton, which fell 62 1/2 cents yesterday to close at $11.18 3/4, have fallen 50 percent since March 1998. Promus, based in Memphis, rose $3.43 3/4 to close at $34.81 1/4.
Although the acquisition will dilute Hilton's earnings in the short term, it could yield strategic strengths in the long term. Most of Hilton's revenue comes from hotels it owns. In fact, more than 60 percent of its pretax earnings in 1998 came from just 10 of its hotels, including New York's Waldorf-Astoria. Moving further into the franchise business will broaden its sources of both revenue and earnings.
Also, the lodging industry in the United States faces a supply-demand imbalance. Analysts feel that with Promus in the fold, Hilton will ride the ups and downs better. "Management and franchise operations tend to be less volatile because their revenues are more or less fixed," said Keith Mills, lodging analyst at PaineWebber.
Hilton expects $90 million in cost savings annually from the merger, after a $55 million savings the first year, in areas including corporate functions and purchasing.
The merger is scheduled for completion by the end of the year.