M&A

Room at the Inn? How Hilton’s CFO Accommodated Another Acquisition

Matthew Hart's masterminding of Promus Hotels integration has pushed Hilton to the top of the lodging game.
Lori CalabroOctober 31, 2001

Hilton Hotels Corp.’s blockbuster 1999 acquisition of Promus Hotels wasn’t the most dramatic deal CFO Matthew Hart has ever done. That honor belongs to the 1991 breakup of his previous employer, Marriott, which famously alienated bondholders on the way to becoming a landmark success for that hotel and services giant. But as Hart’s smoothest deal, Promus is the winner, hands down.

“All the deals that I’ve done have been different, but I still can’t believe how the Promus management was so delighted we acquired them,” says the 49-year-old Hart. “We were in the same industry. We knew the business,” he says. Moreover, “they had what we needed, and we had what they needed.”

Promus’s main requirement was a lifeline, in the wake of its own troubled merger with Doubletree Hotels. And on the acquirer’s side of the ledger, the $3.7 billion cash and stock Hilton-Promus deal represents “a tremendous transformation,” says Hart — one that comes closer than ever to creating the “innkeeper to the world” envisioned decades ago by founder Conrad N. Hilton. Prior to the acquisition, Hilton’s 250 properties paled in comparison with the holdings of Marriott (1,800) and Starwood (750). Postmerger, Hilton presides over 1,900 hotels, including Embassy Suites, Hampton Inn, Doubletree, and Red Lion. While its name is still associated with high-end accommodations, Hilton offers rooms for every budget. Its 2000 revenue soared to $3.5 billion, with net income climbing to $272 million.

“This was a big deal, one that made sense at the time and will continue to make sense,” says Jason Ader, senior managing director at Bear, Stearns & Co. And because Hilton’s acquisition “rounded out the brand portfolio,” it has provided some insulation for the current chilly travel environment, adds Michael Rietbrock, managing director at Salomon Smith Barney. In fact, while Hilton’s second-quarter earnings slipped 2.3 percent, to $86 million, the period still exceeded analyst forecasts, thanks in part to cost savings from the merger.

Much of the credit for the transaction’s success, says Hilton CEO Stephen Bollenbach — a legendary deal maker in his own right — goes to Hart, whom he describes as “the most accomplished finance person in the hotel business.” Without Hart, “there wouldn’t have been a deal,” he says, adding that the CFO’s most important contribution was “forging the integration of two companies that had a lot of differences in the way they operated and in their business objectives. It wasn’t easy, but Matt made it easy.”

Hold the Mayo

Hilton’s interest in Memphis-based Promus had stretched back two years before the deal was struck, says Hart, who joined Hilton in May 1996 after stints as treasurer of The Walt Disney Co. and CFO of Host Marriott. (He served with Bollenbach in both companies.) But Hilton and Promus were far apart on price. Indeed, it wasn’t until Promus’s difficulties with Doubletree — which along with the softening of the entire hotel market weakened Promus’s stock price — that the two began discussions in earnest.

Back then, in the summer of 1999, it didn’t take long to hammer out a valuation roughly eight times Promus’s projected 2000 earnings before interest, taxes, depreciation, and amortization. Raising the financing was another story, says Hart, since Promus required that it be done quickly and on a “no-outs basis.” That, explains the finance chief, “really separated the men from the boys in the banking market,” because Hilton had to commit to funding the entire purchase price.

What followed was a whirlwind 10 days, as Hart wooed banks on both coasts. Given the tight time frame, he had to be unusually specific about the rates and conditions Hilton wanted — so specific that he drew up a term sheet himself. Showing the bankers his flair for the catchy symbol, he described the preordained terms Hilton was after as “a turkey sandwich on pumpernickel with lettuce and tomato — and you have 24 hours to fill the order.”

In the end, Hart assembled a 25-bank syndicate led by Bank of America N.A., which arranged senior credit facilities totaling $1.85 billion at Libor plus 1.25 percent. Hilton, says Hart, “acquired all the money that was available to the company in the bank market,” and maintained its investment-grade rating of BBB-. To celebrate, the bankers gave Hart a little trophy: a plaster-of-paris turkey sandwich.

Beyond Synergy

The integration process started the day the transaction was announced that September. For Hart, it had delicate moments. His first chore was to ask Bollenbach and Promus CEO Norman Blake to bow out for a while. “Sometimes,” says Hart, “you get more accomplished when the big boss is not there.”

Then Hart set out with a 10-person team of Hilton and Promus managers to identify the “best from each organization” and to disregard sacred cows in their work, he says. With that approach in mind, certain Promus executives became heads of the combined teams, specifically those dealing with information technology and franchising. Most important, says Hart, “when the transaction closed, everyone knew what their job was: no politics, no turf battles. We could just get on with it.”

What they got on with was capitalizing on opportunities for synergy. Within five months, the Hilton Honors guest-loyalty rewards program was installed in 1,400 additional hotels, and marketers were laboring to enhance cross-selling efforts through E-business applications. Previously, customers calling a hotel that was booked up would be transferred to another operator, who would connect them to a sister hotel. Now the rebooking is done by one operator using one screen.

Savings achieved in the first year were dramatic — $72 million, 30 percent more than had been estimated. Hilton expects to save another $100 million this year. And Hart attributes these gains to the assignment of responsibility to key managers whose compensation is based on specific results. He’s done concentrating on the merger in historic terms, though. After this year, “we aren’t going to talk in terms of synergies,” says Hart. “We’ll continue to be focused on cost control, but we are one company now.”

He considers the financing history, too. When the Promus deal closed, Hilton had $5.5 billion in long-term debt — 70 percent floating, 30 percent fixed — and “our target was to reverse that mix,” says Hart. The issuance in August of $200 million of 30-year senior unsecured notes — the proceeds of which paid down all outstandings on a $1.75 billion revolver — completed that goal.

“Eesenhower and Patton”

To Hart, the success of the deal is reflected in the market-share gains at former Promus hotels. Where it hasn’t yet been reflected is in Hilton’s stock, which currently trades at around $12, well below its 1999 highs near $17. But some analysts agree with Hart when he says, “that too will come.”

Sluggishness in the travel business hinders any improvement, of course. Atlanta-based Hospitality Research Group, for one, predicts the average U.S. hotel will suffer a 5.6 percent decline in operating profit this year. Still, “Hilton is as well positioned as you could hope a lodging company to be,” says Bryan Maher, director of U.S. equity research, Credit Lyonnaise.

With the Promus deal closed, Hilton now sits on the M&A sidelines — an unusual spot for Hart and Bollenbach. Their giant deals together at Hilton include the $3.1 billion acquisition of Bally Entertainment Corp. and the spin-off of its casino operations into Park Place Entertainment Corp., as well as an unsuccessful bid for ITT Corp. Hart — who says Bollenbach is “Eisenhower and I’m George Patton” in their deal-making roles — explains they just “don’t see any bargains out there. And the main thing is that we hate to overpay.”

For future hotel purchases, though, Promus would make a great model. Nothing in that deal, Hart says, “could have been scripted any better.”

Lori Calabro is a deputy editor at CFO.

Full Occupancy

Hilton has seen market-share increases this year at newly acquired hotels.

RevPar Index* YTD 6/00 YTD 6/01 Change
Hilton 105.3 106.0 +0.7%
Embassy Suites Hotels 116.3 119.5 +2.8%
Hampton Inns Suites 108.5 115.0 +6.0%
Hilton Garden Inn 96.5 102.9 +6.6%
Homewood Suites Hilton 107.7 112.2 +4.2%
Doubletree 93.6 98.1 +4.8%

*The RevPar (revenue per available room) Index of 100 represents a brand’s “fair share” of the market.

Source: Smith Travel Research

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