Hilton, Grand Casinos still talking

Gary Thompson

Wednesday, April 8, 1998 | 11:15 a.m.

Hilton Hotels Corp. continues exploring the possibility of acquiring Grand Casinos Inc., then splitting into separate gaming and lodging companies.

An acquisition of Grand -- which owns three resorts in Mississippi, including the two largest currently operating on the Gulf Coast -- would give Hilton's gaming spinoff a presence in the three top casino markets in the country.

Sources say such a deal would also allow Hilton to show a compelling business reason for a split, which could result in a tax-free transaction. The Internal Revenue Service frowns on strategies engineered solely to avoid taxes, but generally allows companies leeway in moves aimed at expanding business opportunities.

Hilton President Stephen Bollenbach has been eager to consummate a deal that would allow a split of the gaming and lodging businesses because he believes the resulting separately traded stocks would receive a higher valuation from the investment community.

Lodging stocks have traded at higher multiples of cash flow than gaming companies, which face competitive pressures and limited domestic growth opportunities.

Cash flow, or earnings before interest, taxes, depreciation and amortization, is the most widely used measure of valuation for casino companies.

Investors typically value casino operators by comparing the estimated cash flow to the company's enterprise value, or combined equity and debt.

Casino operators have recently been trading at five to 10 times cash flow, while lodging companies generally trade at higher multiples.

Hilton attempted a hostile takeover of ITT Corp. last year, but lost to a higher bid by the real estate investment trust Starwood Hotels & Resorts Worldwide. Hilton and Circus Circus Enterprises Inc. recently broke off merger talks.

Hilton has considered an acquisition of Grand Casinos in the past, but had wanted to determine the impact of Mirage Resorts Inc.'s Beau Rivage on the Mississippi Gulf Coast market before acting. Plagued by construction delays, the $1 billion Beau Rivage is now scheduled to open next February.

Grand's Grand Casino Biloxi and Grand Casino Gulfport currently command the lion's share of the Gulf Coast market, and its Grand Casino Tunica is the largest casino between Las Vegas and Atlantic City.

Grand's Biloxi and Gulfport properties contribute about $100 million of cash flow, while Tunica adds about $50 million to $60 million, analysts said. The total is expected to drop once Beau Rivage opens, though Grand and/or Hilton would likely act aggressively to defend their customer base.

Grand also manages three Indian casinos; a contract with a fourth expired last week. The four Indian casinos had provided about $80 million in cash flow, which will drop. A second contract expires next May.

It's possible the two Louisiana tribes for which Grand runs casinos would veto a Hilton takeover, which would leave Hilton with the three owned Grand casino properties as well as an undeveloped site Grand holds on the Las Vegas Strip.

Grand has about $500 million in debt. At this morning's trading price of about $18 a share, the company's current equity valuation is about $781 million, giving it a total enterprise value of about $1.3 billion.

That gives the company a multiple of about 8.3 times this year's anticipated non-Indian casino cash flow. As of last Dec. 31, Grand had about $240 million in cash.

Grand has delayed moving its headquarters from Minnesota to Mississippi pending the outcome of the merger talks.