Hilton Buys Promus And The Promise Of Franchising

<B> Hilton Buys Promus And The Promise Of Franchising</B>

By Cheryl Rosen

Beverly Hills, Calif. - In a Labor Day courtship consummated in the wee hours of the morning, Hilton Hotels Corp. finally signed the major acquisition it has long been seeking--a $4 billion deal to buy out Promus Hotels Corp. of Memphis and its portfolio of Doubletree, Embassy Suites, Hampton Inn, Homewood Suites and Red Lion hotels.

Hilton will pay $38.50 per share in cash for 55 percent of Promus and exchange the balance for Hilton stock.

Hilton CEO Stephen Bollenbach said the company is anxious to grow its presence in the extended-stay and budget segments of the market, and to move more of its business to franchising, "where we are earning fees rather than owning" hotels outright.

"In a down cycle," as many are predicting, "it hurts more to own," Bollenbach noted. "Our goal with smaller hotels is not to be a big owner, but a major franchisor." Where until now management and franchising contracts accounted for about 13 percent of Hilton's business, the Promus acquisition will push that number to nearly 30 percent.

Bollenbach also noted the difficulty of growing a hotel company in the current climate, where the real estate investment trusts that typically finance high-end projects are being battered by Wall Street. "The fall of the REIT stocks has put a damper on the whole industry," he said. "The real impact is that there's not a lot of liquidity, so a huge source that would otherwise own properties has left the market. The REITs have lost the ability to finance $100 million hotels."

In addition to growing the Hilton brand, the current deal also brings Hilton's national sales force, with its established base of corporate transient and group business--not to mention the Hilton's HHonors frequency program--to Promus's established brand names.

Hilton intends to keep all the Promus brands, though it might fold Hilton Residential Suites into Homewood Suites. The current plan is to continue growing Red Lion, a name Promus has been bringing back to its base in the West. The Doubletree brand "will stay alone," though "there may be some properties that will make more money if they are Hiltons," and vice versa, Bollenbach said. Already scheduled for a "big leap" in size to about 200 properties nationwide next year, Hilton's new midpriced Hilton Garden Inns, "will probably stay."

All brands will be rolled into the HHonors frequency program. CFO Matt Hart noted that when Hilton first made HHonor available to Hilton International customers, "the results were immediate." In its first year, 21 percent of occupied room nights were HHonors guests, and the program was credited with generating $100 million in incremental revenue.

On the international side, Hilton will retain its growing ties with joint venture partner Hilton International, and Bollenbach said he does not currently envision development of Hilton or Promus brands outside the Americas. While it "clearly helps the alliance when we add units in the United States, just as it helps when they add units outside the United States, to go into the heart of Hilton International's market and compete head on might make an enemy" of a company that is now a friend, he said.

The approval of shareholders of both companies still is required on the deal, but both boards of directors have agreed to it, and Bollenbach said he expects it to close in November. The new combined company will have nearly 1,700 hotels, with 290,000 rooms, in virtually every sector of the market.

Hilton plans to cut $55 million in costs in the merged entity's first year and $90 million thereafter as the two companies share marketing, purchasing, operations and technology.