Buyers Eye Hilton-Sheraton Bout

Hilton's hostile bid for the Sheraton flag has left travel managers divided over the impact of such a takeover. Cutting out a major player could hinder competition, many said, citing the winnowing on the airline and car rental sides.

"The two are great competitors," said Mike Kabo, former director of global travel and conferences for Avon Corp. "If they merge, the down side is you'll lose some competition to keep rates in line."

Others pointed to the myriad of other players. "So long as there are other large competitors, the impact of a merger should not be a major event for corporate travelers," said Joyce Bembry, manager of business travel services at DuPont.

While the Hilton deal wouldn't erase the Sheraton name, the latter chain would move down a notch in positioning, according to an analyst close to the proposal who predicted the chances that the takeover will happen are 55-45 in favor of Hilton.

As a franchised brand of the HFS group--which includes the Days Inn, Howard Johnson and Ramada brands, among others--"we would actually have a new upper middle-market player in Sheraton," the analyst said. "Hilton would probably move up half a notch in positioning because Sheraton would move down a full notch."

Hilton first made overtures toward Sheraton last fall but was rebuffed, according to American Hotel & Motel Association president Bill Fisher.

ITT also spurned Hilton's formal $6.5 billion takeover bid last month, saying that it would consider selling "non-core" assets, including its 50 percent holdings in Madison Square Garden and the New York Knicks and Rangers basketball and hockey teams. Meanwhile, ITT filed a lawsuit against Hilton, charging that it had used information it obtained when Sheraton bought the Bally gaming subsidiary from Hilton last summer to put together its hostile bid for Sheraton, in violation of the confidentiality agreement it signed at that time. The suit also is a response to the suit Hilton filed against ITT to prevent it from using its poison-pill antitakeover measures.

"Each week we learn more of the antitakeover actions of [Sheraton chairman Rand] Araskog, and clearly he's good at this," said one source. "But we also have to understand that [Hilton CEO Stephen] Bollenbach is as good a financial engineer as there is."

Sheraton's annual shareholders meeting--which originally was set for May but might not happen until November--will mark the next major step. One analyst guessed that Araskog doesn't have a date in mind yet, but early fall--perhaps September--seemed likely.

While Hilton is trying to persuade large-block shareholders to call for the annual meeting or for a special vote, "that's not likely," one analyst said. "That only happens when the shareholders hate current management and want a deal to happen. And I think the shareholders think that the longer this plays out, the higher the price is likely to be."

Until the meeting, "Sheraton will keep putting out news about selling off divisions, maybe acquiring Harrah's, some recapitalizations, new board members, and a flow of what seems like very good news," one analyst said.

Should the takeover happen, the best Sheratons would become Hiltons, while other upscale, urban Sheratons would retain the name under management of the new Hilton company, another analyst said.

HFS, meanwhile, would acquire the franchised Sheraton hotels--few of which are upscale--and then would "spread Sheraton across the country," according to one analyst. "[HFS chairman] Henry Silverman has a high degree of loyalty from the franchisees of his brands," the analyst said. "He would go out to his owners and ask them to convert their upscale hotels to Sheraton."

As Sheraton would fit the missing upscale piece in the HFS portfolio of brands, the group would most likely grow that brand more aggressively than Sheraton's midpriced Four Points brand, one analyst said.

Sheraton's current innovations in the business travel arena, however, might not translate to the lower-level HFS version, some buyers feared. "The only negative would be if all of a sudden the progressiveness of Sheraton stopped," one travel manager said.

A new global megachain in the league of Marriott and Holiday Inn also could curb negotiating power, some buyers said.

"Marriott is strong in most markets, and they're very difficult to negotiate with," said one travel manager. "I see that a Hilton/Sheraton chain would take the same position. It's not something I'm very excited about."

"Financially, negotiating would be a little more difficult, just as it is with the car rental companies," said Carol Salcito, president of Management Alternatives, a Stamford, Conn.-based consultancy.

Others would welcome the worldwide spread. "What this would do for Hilton is give them a real hold on the global market, because Sheraton is around the world," one Hilton client said. "And we're negotiating worldwide nowadays, so in that regard it would make my life easier."

Travel management consultants Rolfe Shellenberger, senior consultant for Rochester, Wis.-based Runzheimer International, and Gerard Smith, senior partner of the T&E Group, Newport Beach, Calif., pointed out that adding an array of hotels wouldn't necessarily affect negotiations at all.

"Most travel managers negotiate on a property-by-property basis anyway," said Shellenberger. "Few chain headquarters have centralized pricing power. If a hotel gets three room nights, to them that's all it's worth."

Should the takeover effort fall through, the battle still marks an era of hotel consolidation.