July 4 (Bloomberg) -- Hilton Hotels Corp.'s stock price surged prior to the announcement that the second-largest U.S. hotel chain will be acquired by New York-based Blackstone Group LP for about $20 billion in cash.

Hilton shares climbed $2.18, or 6.4 percent, to $36.05 yesterday in New York, their biggest rally since 2005. After the close of trading, Blackstone, the world's biggest publicly traded buyout firm, said it will pay $47.50 a share for Beverly Hills, California-based Hilton.

The gain in the stock price probably means word of the transaction ``leaked prematurely,'' said Scott Moeller, a professor of mergers and acquisitions at Cass Business School in London. ``The parties may have had to announce the deal before they intended.''

The U.S. Securities and Exchange Commission is stepping up investigations of suspected insider trading ahead of takeover agreements, which are running at a record $2.7 trillion so far this year. The SEC sued a Hong Kong couple May 8, claiming they traded on inside information about News Corp.'s $5 billion offer for Dow Jones & Co. The agency also is probing trading in shares of companies including TXU Corp. that have received buyout offers.

Officials at Hilton, Blackstone and the SEC weren't immediately available to comment.

U.S. stock markets were closed today for Independence Day. In trading in Germany, Hilton shares jumped $11.87, or 47 percent, to $37.01. They're up 3.3 percent since the end of December.

`Many Layers'

TXU executives met to discuss a takeover with officials from buyout firms a day before trading in options of the Texas power company surged, according to a U.S. regulatory filing. The SEC said last month that it's looking into trading of TXU stock and options during the entire period of merger discussions.

``The sheer size of companies like Hilton and the amount of debt that has to be arranged requires numerous banks and many layers of credit approval in each bank,'' said Philip Keevil, a senior partner at investment bank Compass Advisers LLP in London and a former head of Citigroup Inc.'s European mergers group. That makes it easy for information to leak, he said.

Trading in options to buy Hilton shares also surged yesterday to 22,008, the highest since May 14 and a nine-fold increase from the 20-day average. Call-option volume also rose above 20,000 on Feb. 15 and April 20.

Option Prices Surge

The price of yesterday's most-active contract, August $40 calls, increased eightfold to 85 cents. July $40 calls rose sevenfold to 35 cents from 5 cents. July $30 puts fell 67 percent to 5 cents.

Each call option gives investors the right to buy 100 shares of a company at a certain price, called the strike price, by a given date. A put conveys the right to sell 100 shares.

Implied volatility on options to buy Hilton shares rose yesterday to 40.87 percent, the highest since October 2005. An increase in implied volatility indicates traders anticipate a bigger swing in the stock price.

To contact the reporters on this story: Ambereen Choudhury in London achoudhury@bloomberg.net; Jeff Kearns in New York at jkearns3@bloomberg.net

Last Updated: July 4, 2007 17:25 EDT