Hilton, Grand shares fall despite merger

Thursday, Aug. 20, 1998 | 11:24 a.m.

Grand Casinos Inc. shares have fallen 42 percent since June on concerns about competition after Hilton Hotels Corp.'s purchase of Grand Casinos' three resorts in Mississippi.

Hilton, one of the largest U.S. casino companies, said June 30 it will spin off its casinos into a new company that will buy Grand's three Mississippi resorts for stock and assumed debt that the companies valued at $1.2 billion.

Both Hilton and Grand shares have fallen since then on investor concerns that new casinos in Mississippi and Las Vegas will take business from the Grand Casinos properties and from Hilton's largest resorts in Nevada.

At least one Grand shareholder claims to be displeased with terms of the agreement, in which Grand shareholders are to receive publicly traded stock in both the Hilton gaming spinoff and a separate, surviving Grand company whose assets would include Indian casino management contracts and land in Las Vegas.

While the values of the stocks won't be set until proxy statements are sent out several weeks from now, analysts expect the total value to range from $17 to $22 per Grand share. Grand was trading today at 10 3/8. It was at 17 when the Hilton merger announcement was made in June.

"Am I happy with the deal? No. And I've told management as much," said William Nasgovitz, chief executive of Milwaukee-based Heartland Advisors Inc., which owned 2.57 million Grand shares, or 6.1 percent of the shares outstanding as of March.

Heartland Advisors is Grand's second-largest shareholder after Grand Casinos Chairman Lyle Berman, who has been meeting recently with Hilton gaming chief Arthur Goldberg.

Minnetonka, Minn.-based Grand Casinos is the largest casino operator in Mississippi, the third-largest U.S. casino market after Las Vegas and Atlantic City, N.J. It owns the Grand Casino Biloxi, Grand Casino Tunica and Grand Casino Gulfport in Mississippi and manages casinos on Indian lands in Minnesota and Louisiana.

Beverly Hills, Calif.-based Hilton owns some of the largest hotel-casinos in Las Vegas and Atlantic City. It also owns, operates and franchises about 240 mostly upscale hotels. Investors are expected to place a higher value on Hilton's hotels once they're separated from the slumping casino business.

Still, Hilton shares have fallen 23 percent since the spinoff and purchase were announced, as Hilton prepares to establish a separate casino company that some investors fear will be vulnerable to new competition.

In Mississippi, some analysts believe Grand's casinos will lose business to Mirage Resorts Inc.'s $600 million Beau Rivage casino resort to open in February.

And in Las Vegas, Hilton is building the Paris hotel-casino on the Strip to complement its Las Vegas Hilton, Flamingo Hilton and Bally's properties. They face tough upscale competition from the Bellagio, Venetian, Mandalay Bay, Aladdin, the Resort at Summerlin and Lake Las Vegas properties, all opening within the next few years.

"There's just a great deal of uncertainty about the value of Hilton's casino portfolio," said BancAmerica Robertson Stephens analyst Harry Curtis.

Other analysts, though, noted that a Hilton merger would give Grand geographic diversification and strong growth opportunities and said they don't understand Wall Street's reaction to the deal, especially in light of the minimum seven-point spread between the anticipated exchange ratio and Grand's current price.

There's some speculation that Berman, who often plays high-stakes poker in Las Vegas, may see the purported third-party opposition to the deal as an opportunity to gauge Hilton's receptiveness to an increase in the merger price.

Some observers said Beau Rivage, which is due to open on the Gulf Coast next year, will expand that market, benefiting Grand's nearby casinos, while business at Grand's Tunica property is expected to continue growing.

Hilton executive Marc Grossman said the Hilton-Grand merger and gaming spinoff are proceeding on schedule. "We have things on track to complete the transactions by the end of the year."