Hilton Bids $10.5 Billion to Take Over Rival ITT

In a deal that would combine two of the biggest names in the hotel and gambling businesses, Hilton Hotels Corp. on Monday launched a takeover bid for rival ITT Corp.--whose holdings include Sheraton hotels and Caesars Palace in Las Vegas--in a deal valued at $10.5 billion.

Hilton’s apparently hostile offer would create the world’s largest hotel and gaming company and heralds intensified competition for rival casino operators and hoteliers.

A Hilton-ITT deal would place some of the most prestigious names on the Las Vegas Strip--Flamingo Hilton, Caesars Palace, Bally’s and the Desert Inn--under ownership of Beverly Hills-based Hilton. It would combine 30 casinos worldwide, and rank as the boldest move yet in the lucrative but slow-growing gaming industry, where major players are buying up their competitors.

Only last year Hilton swallowed Bally Entertainment Corp. in a $3-billion deal, beating out ITT for the casino company.

The proposed union of Hilton and ITT, which between them own 655 hotels, including the Waldorf-Astoria in New York and the Palace Hotel in San Francisco, also would be the most dramatic example of Hilton’s strategy to acquire landmark hotels in major cities.

Hilton President and Chief Executive Officer Stephen F. Bollenbach said the offer for ITT is part of the company’s plans to remain a dominant player in the gaming industry and to boost its portfolio of large hotel properties.

“We have the financial strength to do it. We have the management strength to do it. It’s just a good time for us,” said Bollenbach, who estimates the combined companies can save at least $100 million a year by eliminating overlapping operations.

Most of the savings would come from cutting duplicate corporate operations and staff. Hilton would also likely cut back on ITT’s ambitious $3-billion program to upgrade and expand its casino and hotel operations.

Hilton already boasts 16 gaming properties, ranging from riverboat casinos to three huge casino-hotels in the nation’s gaming capital, Las Vegas.

A merger “gives them an overwhelming edge,” said William N. Thompson, a gambling industry expert at the University of Nevada at Las Vegas. “They would be so much bigger than anyone who’s in second place.”

Thompson said the merger could also raise concerns about the creation of a gaming company so large it could choke competition in some markets and raise antitrust issues. “It would invite more federal attention,” he said.

Hilton used a carrot-and-stick approach in launching its cash and stock offer. Hilton has offered ITT stockholders a deal worth $55 per share--nearly 30% above the closing price on Friday. Bollenbach indicated that the offer price might go up after further negotiations with the company. He also threatened ITT leadership with a possible fight to take control of the company’s board of directors if the company does not go along with the deal.

“We are committed to making this combination a reality,” said Bollenbach in a letter to ITT Chairman and Chief Executive Officer Rand V. Araskog. Bollenbach said he tried and failed to reach Araskog by telephone on Monday.

Officials at New York-based ITT, which rebuffed a Hilton overture last fall--said Monday they would make a recommendation to shareholders within 10 days. “We ask [shareholders] not to take any action until then,” said company spokesman Jim Gallagher. Shareholders are free to accept or reject Hilton’s offer for their stock.

Despite the premium Hilton has offered for ITT shares, investors were apparently confident higher offers would be forthcoming from either Hilton or other bidders. In the wake of the bid, ITT shares rocketed $14.75 from their closing Monday on the New York Stock Exchange to $58.50 in after-hours trading.

Hilton shares were off 50 cents to $25.25 at Monday’s close in regular trading on the New York Stock Exchange.

Few companies are in a position to top Hilton’s bid, said analysts who follow the lodging and gaming industries. None of the other major gaming companies--such as Mirage or Circus Circus--have the deep pockets to compete with Hilton on the deal. Meanwhile, Hilton’s hotel rivals lack the company’s decades of experience and huge presence in the gambling business.

“There is no other company that I know of that has as strong management expertise and financial capacity to make an acquisition of this size,” said industry analyst Andrew Zarnett.

As part of Hilton’s offer, which must be approved by various state gaming regulators, it would assume about $5 billion in outstanding ITT debt and offer $6.5 billion in cash and Hilton stock to ITT shareholders.

Although better know for its chain of 240 hotels, Hilton has been involved in gambling since 1947, when the company began operating a Puerto Rico hotel-casino, which the company no longer owns. During the last decade, gambling has grown to generate about half of the company’s operating revenue and, in some years, the majority of its profit.

The company angered many investors during the early 1990s with often-abrupt changes in corporate strategy that involved selling the entire company or spinning off the gambling operations. But after Bollenbach, 54, a former Disney executive, joined Hilton in 1995, the company adopted a more consistent approach that focused on keeping and expanding its hotel and casino operations.

Hilton and ITT own and operate some of the world’s most prestigious and lucrative hotel and gaming properties, making a combination of the two an awesome industry powerhouse, according to industry analysts. Sheraton, for example, owns the Palace Hotel in San Francisco, the Phoenician resort near Phoenix and the St. Regis in New York. Hilton owns the Waldorf-Astoria in New York and the Beverly Hilton in Beverly Hills.

ITT entered the gaming business in 1995 by acquiring Los Angeles-based Caesars World, which owns the famed Caesars Palace in Las Vegas, a sister casino in Atlantic City and numerous other gaming properties. The company has announced plans to build an $830-million casino-hotel in Las Vegas in partnership with theme-restaurant operator Planet Hollywood International.

ITT, which has undergone a radical reorganization to focus on entertainment and sporting events, also owns a 50% stake in Madison Square Garden in New York as well as the New York Knicks basketball team, New York Rangers hockey team and broadcasting outlets in the New York area.

Hilton apparently has little interest in those entertainment properties, which it said “would be carefully reviewed as to their long-term strategic fit with the combined company.” ITT’s acquisition of Caesars World raised eyebrows among officials of the National Basketball Assn. and the National Hockey League, which frown on ownership of their franchises by gambling interests.

Hilton would keep only 72 of the 415 Sheraton hotels that ITT owns outright, Bollenbach said. The Sheraton name and franchise system would be licensed to HFS Inc., a larger operator of hotel franchises.

ITT Corp. is one of three companies that were formed in late-1995 when the “old” ITT was broken apart, dismantling one of America’s last giant conglomerates.

The “new” ITT kept the company’s entertainment and lodging interests, and ITT Hartford Group Inc. was formed to assume its insurance operations. The third new company, ITT Industries Inc., took over operation of its defense and automotive-components group.

Araskog ultimately decided to bust apart ITT so that all three pieces would command higher values on Wall Street, where the old ITT’s stock had long struggled to flourish.

The new ITT traded at a high of $66.50 in July but has been selling in the low $40-a-share range since fall.

Times staff writers Sallie Hofmeister and Jim Peltz contributed to this story.

* ON A ROLL: More casino mergers seen. D1