Hilton Offers $10.5 Billion in Bid 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 transaction 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 be the boldest move yet in the consolidation of the lucrative but slow-growing gaming industry, and would place some of the most prestigious names on the Las Vegas Strip--Las Vegas Hilton, Flamingo Hilton, Caesars Palace, Bally’s and the Desert Inn--under Beverly Hills-based Hilton’s ownership.

Hilton only last year swallowed Bally Entertainment in a $3-billion deal.

The union of Hilton and ITT, which between them own 655 hotels, including the Waldorf-Astoria in New York, and 30 casinos worldwide, is also the most dramatic example of Hilton’s strategy to own 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 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 already boasts 16 gaming properties, ranging from riverboat casinos to three huge casino-hotels in the nation’s gaming capital, Las Vegas. Its 240 hotel properties include the Beverly Hilton in Beverly Hills.

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 cut competition.

Hilton used a carrot-and-stick approach in launching its cash and stock offer, which it valued at $55 a share--nearly 30% above ITT’s closing stock price on Friday. Bollenbach indicated that the offer price might go up after further negotiations, but he also threatened to lobby ITT shareholders to oust ITT’s board of directors if the company’s management opposed the takeover.

“We are committed to making this combination a reality,” said Bollenbach in a letter to ITT Chairman and Chief Executive Officer Rand V. Araskog.

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.

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.

In addition, 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 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 stake in Madison Square Garden in New York as well as the New York Knicks, New York Rangers and WBIS, a New York area news and sports radio station.

But 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.

Despite Hilton’s premium for ITT shares, investors were apparently confident that higher offers would be forthcoming either from Hilton or from other bidders. In the wake of the bid, ITT rocketed $14.75 to close at $58.50 Monday on the New York Stock Exchange.

Hilton was off 50 cents Monday, closing at $25.25 on the New York Stock Exchange.

But if anyone is going to top Hilton’s bid, it will be Hilton, 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. 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, it would assume about $5 billion in outstanding ITT debt and offer $6.5 billion in cash and Hilton stock to ITT shareholders.

Hilton intends to keep only 72 of the 415 Sheraton hotels that ITT owns outright, officials say. 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.

Times staff writer Jim Peltz contributed to this story.