December 29, 2005

Hilton buys hotels from UK namesake

By David Jones and Christian Plumb

LONDON/NEW YORK (Reuters) - Hilton Hotels Corp. on Thursday
said it would buy its British namesake's hotels for 3.3 billion
pounds ($5.7 billion), in a deal to boost its international
footprint to catch up with larger U.S. rivals.

Hilton Hotels will acquire 40 hotel properties in the UK
and Europe, along with 200 leased hotels, a switch from the
company's previous strategy of selling off real estate to
generate management fees and distribute the cash to investors.

"It's a dramatic departure from the asset-light strategy,"
which was popular with investors, said Robert LaFleur, an
analyst at Susquehanna Financial Group.

Hilton Hotels shares surged more than 7 percent to their
highest level in more than four months on what LaFleur said was
probably relief that the deal would not be dilutive to 2006

The deal leaves Britain's Hilton Group Plc, which had
recently sold some 400 million pounds of hotel assets, with
gambling business Ladbrokes -- whose name it will now assume.

The merger will reunite the Hilton brand after the business
split in 1964 with the U.S. company running all Hilton hotels
in the United States and the UK group operating the brand
elsewhere around the world.

Hilton Group Plc shares in London closed up 1.2 percent up
at 368-3/4 pence after the deal was announced minutes before
the London close.


Analysts said the deal reflected a desire by U.S.-based
hoteliers to use their highly rated shares to expand overseas.
Starwood Hotels & Resorts Worldwide Inc. is thought to have
eyed up UK-based Intercontinental Hotels Plc.

Other North American chains could now feel pressure to
follow suit.

"I think it forces the people that want to compete in this
space to really have an international footprint," said Jeff
Randall, an analyst at AG Edwards, mentioning closely held
Hyatt and Canada's Fairmont Hotels & Resorts Inc. as chains
which should broaden their geographic base.

In the United States, Hilton owns, manages and franchises
more than 2,300 hotels, while the two Hilton companies operate
a joint venture to expand the luxury Conrad brand, named after
the company's founder, which has about 20 hotels.

The two Hilton groups already share an alliance to cover
joint marketing, reservations and loyalty programs and have for
a number of years discussed a merger.

Hilton said that despite the strategic switch, it plans to
continue selling out of real estate and moving toward the
management-fee based business which is becoming the norm in the
hotel business, with the proceeds going to pay off debt.

"I think they are going to sell off a number of the
assets," said Sam Lieber, president of Alpine Mutual Funds,
which owns stock in both Hilton Hotels Corp. and Hilton Group.
"The real plumb here is the Conrad brand, which has much more
cache in Asia. I think that is what they want to build out."

Hilton Hotels will pay about $1.2 billion of the purchase
price with cash on hand and finance the rest through a bank
facility led by Bank of America and UBS.

Credit agency Standard & Poor's said it was keeping a
"negative" watch on Hilton Hotels' ratings, and Moody's has
placed Hilton Hotel's ratings on review for possible downgrade.

Moody's also cut Hilton Group's senior unsecured long-term
ratings to Baa3, its lowest investment grade ranking, from
Baa2, and said it may lower them further.

"Moody's believes that the business profile of the
remaining entity, Ladbrokes, will be weaker than that of Hilton
Group Plc prior to the transaction," the ratings agency said in
a statement. "The company will not enjoy the same geographic
and business diversity."

Hilton was advised by UBS Securities LLC, with Bank of
America Securities and Morgan Stanley acting as co-advisers.
Deutsche Bank advised Hilton Group.


Conrad Hilton bought his first hotel in 1919 and the first
Hilton brand hotel was built in Dallas in 1926.

The company expanded across the U.S. and then bought its
first European hotel in Madrid in 1953 before financial strains
forced a split in 1964.

Ladbrokes acquired the Hilton business outside the U.S. in
1987, and changed its name to Hilton in 1999 after it acquired
the Scottish casino and hotel operator Stakis.

"It does seem to make sense for both sides really -- this
allows a more focused play for the UK in terms of Ladbrokes,"
said Nick Hodson, equity analyst at Lloyds TSB Private Banking.

Analysts added that an independent Ladbrokes -- re-rated in
line with rival betting shop operator William Hill Plc -- may
look to expand by acquiring casino operator Rank Group Plc
before Ladbrokes becomes vulnerable to a bid.

Last week, Hilton admitted it had received approaches for
Ladbrokes which industry sources said included BC Partners,
Blackstone and CVC Capital which could value the gambling chain
at between 3 billion pounds and 4 billion pounds.

($1=.5756 Pound)

(Additional reporting by Mark McSherry and Paritosh Bansal
in New York)