December 29, 2005

Hilton to buy UK, European Hilton hotels

By David Jones and Christian Plumb

LONDON/NEW YORK (Reuters) - Hilton Hotels Corp. on Thursday
said it would buy its British namesake's hotel operations for
3.3 billion pounds ($5.7 billion), propelling it into the ranks
of rivals with global operations.

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 Hotels, which also operates brands like Embassy
Suites and Doubletree, 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.

But executives at Beverly Hills, California-based Hilton,
said the strategy of divesting owned hotels would remain.

"We want to continue getting out of the real estate
business and more into the fee business," said Chief Executive
Stephen Bollenbach.

Hilton Hotels shares surged 7.6 percent to close on the New
York Stock Exchange at $24.00, their highest level in more than
four months.

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.

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.

"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.

Bollenbach said the international deal offers "a wonderful
growth opportunity" for brands like Embassy Suites, Hilton
Garden Inn, and Doubletree that have so far been confined to
North America.

"As a domestic company, our stock price was valued lower
than companies, like Starwood, that have a larger international
presence," he said.

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 agencies were expected to downgrade the company's
debt to junk.

"We like to have an investment grade ... now one of our
objectives is to grow income and pay down debt," Bollenbach

Moody's also cut Hilton Group's senior unsecured long-term
ratings to its lowest investment grade ranking, 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.


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.

Hilton said it is paying 11.3 times 2006 adjusted earnings
before interest, taxes, depreciation and amortization (EBITDA)
for the Hilton Group assets. That is about in line with the
hotel sector as a whole, Randall said.

But the valuation is still expensive relative to Hilton's
own shares, which trade at 9.2 times 2006 EBITDA, at a discount
to the group in part because of its lack of international
exposure, he said.

($1=.5756 Pound)

(Additional reporting by Mark McSherry and Paritosh Bansal
in New York and Deena Beasley in Los Angeles)