Hilton UK sells hotels to US namesake

LONDON/NEW YORK - Hilton Hotels has said it would buy its British namesake's hotels for 3.3 billion pounds ($5.7 billion), in a deal to boost its international footprint to catch up with larger US rivals.

Hilton Hotels will acquire 40 hotel properties in the UK and Europe, along with 200 leased hotels, a switch from the company's previous strategy of selling off real estate to generate management fees and distribute the cash to investors.

"It's a dramatic departure from the asset-light strategy," which was popular with investors, said Robert LaFleur, an analyst at Susquehanna Financial Group.

Hilton Hotels shares surged more than 7 per cent to their highest level in more than four months on what LaFleur said was probably relief that the deal would not be dilutive to 2006 earnings.

The deal leaves Britain's Hilton Group, which had recently sold some 400 million pounds of hotel assets, with gambling business Ladbrokes -- whose name it will now assume.

The merger will reunite the Hilton brand after the business split in 1964 with the US company running all Hilton hotels in the United States and the UK group operating the brand elsewhere around the world.

Hilton Group shares in London closed up 1.2 per cent up at 368-3/4 pence after the deal was announced minutes before the London close.

Analysts said the deal reflected a desire by US-based hoteliers to use their highly rated shares to expand overseas. Starwood Hotels & Resorts Worldwide is thought to have eyed up UK-based Intercontinental Hotels.

Other North American chains could now feel pressure to follow suit.

"I think it forces the people that want to compete in this space to really have an international footprint," said Jeff Randall, an analyst at AG Edwards, mentioning closely held Hyatt and Canada's Fairmont Hotels & Resorts as chains which should broaden their geographic base.

In the United States, Hilton owns, manages and franchises more than 2,300 hotels, while the two Hilton companies operate a joint venture to expand the luxury Conrad brand, named after the company's founder, which has about 20 hotels.

Discussed merger

The two Hilton groups already share an alliance to cover joint marketing, reservations and loyalty programs and have for a number of years discussed a merger.

"I think they are going to sell off a number of the assets," said Sam Lieber, president of Alpine Mutual Funds, which owns stock in both Hilton Hotels and Hilton Group. "The real plumb here is the Conrad brand, which has much more cache in Asia. I think that is what they want to build out."

Hilton Hotels will pay about $1.2 billion of the purchase price with cash on hand and finance the rest through a bank facility led by Bank of America and UBS.

Credit agency Standard & Poor's said it was keeping a "negative" watch on Hilton Hotels' ratings, and Moody's has placed Hilton Hotel's ratings on review for possible downgrade.

Moody's also cut Hilton Group's senior unsecured long-term ratings to Baa3, its lowest investment grade ranking, from Baa2, and said it may lower them further.

"Moody's believes that the business profile of the remaining entity, Ladbrokes, will be weaker than that of Hilton Group Plc prior to the transaction," the ratings agency said in a statement. "The company will not enjoy the same geographic and business diversity."

Hilton was advised by UBS Securities LLC, with Bank of America Securities and Morgan Stanley acting as co-advisers. Deutsche Bank advised Hilton Group.

"It does seem to make sense for both sides really -- this allows a more focussed play for the UK in terms of Ladbrokes," said Nick Hodson, equity analyst at Lloyds TSB Private Banking.

Analysts added that an independent Ladbrokes -- re-rated in line with rival betting shop operator William Hill -- may look to expand by acquiring casino operator Rank Group before Ladbrokes becomes vulnerable to a bid.

Last week, Hilton admitted it had received approaches for Ladbrokes which industry sources said included BC Partners, Blackstone and CVC Capital which could value the gambling chain at between 3 billion pounds and 4 billion pounds.

- REUTERS