Hilton boosts bid for ITT

Gary Thompson

Monday, Nov. 3, 1997 | 11:28 a.m.

Hilton Hotels Corp. raised its hostile bid for ITT Corp. today to $80 a share -- 55 percent in cash -- and sued ITT directors for damages.

The lawsuit also seeks to rescind several ITT defensive measures, including a merger agreement with Starwood Lodging Corp., which has offered $82 a share -- though just $15 per share in cash -- for ITT.

The increased offer and lawsuit, announced just 10 days before ITT's board faces a shareholder vote, may finally force ITT Chairman Rand Araskog to negotiate with Hilton.

Among "unlawful actions" Hilton is challenging is a $165 million "golden parachute" ITT's board approved for a handful of officers shortly after the initial takeover bid by Hilton. Araskog's share, payable immediately upon a change in control at ITT, would be $55 million.

The suit also seeks $500 million in damages from all ITT directors for allegedly violating their fiduciary responsibilities to ITT shareholders.

"They have got a big-time liability here due to their coercive tactics and we're going to pursue them on it," said Hilton President Steve Bollenbach.

ITT Vice President Jim Gallagher said directors "will exercise their fiduciary duties and evaluate all offers for ITT. ITT remains committed to maximizing the value of the company to its shareholders. "

"We haven't been served with the lawsuit yet, so we can't comment on it," Gallagher said. "As far as fiduciary responsibilities are concerned, our duty is to increase shareholder values. And Hilton has revised its offer twice, from $55 to $70 and now $80 a share. That's called creating value."

"This is certainty vs. uncertainty," Bollenbach said. "We can complete the cash tender within 10 days, while we think the Starwood deal would take six to nine months, if it ever goes through."

Hilton's two-step offer includes $80 per share in cash for 55 percent of ITT's 122.7 million common shares.

Hilton will also exchange two shares of Hilton common for each remaining ITT share, along with "contingent value" preferred shares guaranteeing that the Hilton stock price will reach $40 per share within one year after the merger.

If not, shareholders would receive an additional amount equal to the difference between the Hilton stock price and $40 per share up to a $12 maximum per Hilton share.

In early trading today, Hilton stock was up 25 cents to $31.0625. ITT shares rose $1.625 to $76.625, while Starwood slid 81.25 cents to $59.

Hilton said the cash tender offer would be completed within two weeks if it wins a proxy contest by replacing ITT's incumbent board with its own nominees at ITT's Nov. 12 annual meeting.

The merger is expected to close within 90 days after the election, subject to appropriate regulatory and other approvals, Hilton said.

"Our revised offer is clearly superior in that it brings more value, more certainty and a number of significant advantages to ITT shareholders, Bollenbach said.

"Shareholders receive more cash immediately under our offer as compared to the Starwood bid, while the share price guarantee further increases the certainty and value of our offer, especially when compared to the uncertainty and risks built into the Starwood bid."

Starwood officials said today they are reviewing the Hilton offer and had no comment.

Hilton Executive Vice President Matt Hart said the ITT acquisition will be nondilutive on an earnings-per-share basis in the first 12 months after closing the transaction, and accretive thereafter.

"On a free-cash-flow -- net income plus depreciation, amortization and goodwill -- per-share basis, we expect the transaction will be more than 35 percent accretive in 1998," he said.

"The Starwood offer is long on questions and short on answers," Bollenbach said.

He cited potential for significant delays and uncertainty in closing, the prospect that Starwood's thinly traded stock will experience downside volatility prior to and after closing, Starwood's public comments that call into question the future of ITT's gaming operations, and congressional concerns about the paired-share REIT structure.

"The bottom line is that our new offer provides greater and more certain value, as well as greater speed and certainty of completion," Bollenbach said.

"While the Starwood bid, which will be paid 82 percent in Starwood 'paired shares' and only 18 percent in real dollars, has a purported value of $82 per ITT share, its actual value is far lower."

He said serious issues with respect to the true value of Starwood's paired shares, the sustainability of Starwood's tax avoidance structure, the timing of completion of the proposed Starwood merger, and the question of whether the proposed Starwood merger will close at all "create substantial risks and uncertainties that greatly reduce the value of Starwood's bid."

Bollenbach said a recent decline in interest rates played a role in the increased offer.

"Financing a lot of this transaction with long-term debt and having interest rates go lower recently -- as much as 40 basis points -- made a huge difference in deciding to raise the offer," he said.

Hilton's lawsuit seeks to rescind the Starwood merger agreement, particularly the "grossly excessive" break-up fees and expenses that the ITT board granted to Starwood under the agreement, and to recover damages from members of the board individually.

In addition to the Starwood break-up fees and expenses, which were granted as part of an auction for ITT that expressly excluded Hilton, these unlawful actions include:

* Unilaterally granting $165 million in golden parachutes to ITT executives, a violation not only of the board's duties but also of ITT's own policy of not granting golden parachutes without shareholder approval.

* Issuing $550 million of European junk bonds obligating ITT to pay exorbitant interest rates, in furtherance of ITT's break-up plan, just 10 days before the Nevada federal court enjoined that plan because its primary purpose was to entrench the incumbent ITT board.

* Granting $29 million in break-up fees and expenses to Clayton, Dubilier & Rice in connection with the abandoned plan.

* And agreeing to change-of-control penalty provisions in hotel management contracts and franchise agreements, which will be triggered if the incumbent ITT board is removed.