Can Hilton Draw A Full House?

Barron Hilton, the normally dour chairman of Hilton Hotels Corp., chuckles as he tells the story. Back in 1946, Las Vegas developer Del Webb, a family friend, was building the Flamingo casino for mobster Bugsy Siegel. When funds ran low, Webb called a meeting to raise more cash from Siegel's shady associates. "This guy from Chicago tells Del he can have some money in three months," Hilton recalls. But "when the cash arrived in just 30 days, Del knew right then that casinos were going to be a great cash-flow business."

No kidding. Ever since the late 1970s, when Atlantic City opened for gambling and the fortunes of Las Vegas revived, Wall Street has been drawn to cash-generating companies such as Circus Circus Enterprises Inc. and Mirage Resorts Inc. Yet Hilton, a player in Vegas since 1971, has missed out on much of the excitement. Better known for its ponderous hotel operations than for its glitz, Hilton saw its stock languish below its appraised breakup value for much of the 1980s.

GAME PLAN. But now, Hilton is finally going all out for gaming. Already owner of four casinos in Nevada, the Los Angeles hotelier lately has been popping up anywhere a casino might be built. It is pushing huge projects in New Orleans and Chicago. It intends to take its blackjack tables to such countries as Egypt, Turkey, and Uruguay, and on May 25 it was cleared to build a $265 million casino in Brisbane, Australia. "We will work very closely with any state or city that wishes to explore the benefits gaming can bring," says Hilton, the 64-year-old son of founder Conrad Hilton.

The company realized back in 1990 that it had better snap out of its sluggish ways. Early that year, it rejected separate bids by Chicago's JMB Realty Corp. and Los Angeles financiers Al Checchi and Gary Wilson, majority owners of Northwest Airlines Inc.'s parent company. By that time, Hilton's stock had zoomed to 115 on the takeover rumors, only to fall to 52 when the board took Hilton off the block. "We spent months thinking about the offers," says John V. Giovenco, Hilton's executive vice-president and head of its U.S. casino operations. "When it was all over, we had to sit back and say to ourselves: 'What are we going to do with the company now?' " The result: Hilton decided to let Giovenco, 55, put a mighty wager on gambling.

It's not hard to see why. Last year, the company's earnings fell 33%, to $84.3 million, on $1.1 billion in revenues. But while gaming accounts for 34% of Hilton's overall sales, the four casinos contributed nearly two-thirds of Hilton's $184.8 million in operating earnings. Its biggest winner is the very same Flamingo casino on the Vegas Strip that Del Webb built for Bugsy Siegel. Purchased by Hilton in 1971, the Flamingo alone generated roughly one-third of 1991's operating profit.

As it gets set to expand, Hilton has the support of a sturdy balance sheet. It borrowed relatively little money in the 1980s. Debt now represents 24% of overall capital, in contrast to hotel competitors such as Marriott Corp., with 80%. The company also generates an enviable cash flow--some $223.6 million last year alone. So all in all, Hilton has plenty of room to borrow more.

Still, like most wagers, Hilton's new emphasis on gambling carries a large element of risk. Competition for the gaming dollar is fast and furious, and the stakes are high. Hilton has had to pump more than $156 million into renovating the Las Vegas Hilton over the past five years to keep up with glittering new rivals such as Stephen A. Wynn's Mirage and Circus Circus' Excalibur. Hilton has just announced a $104 million renovation of the Flamingo Hilton to keep pace with three new places opening in the next couple of years, including a theme park connected to Kirk Kerkorian's sprawling MGM Grand Inc. casino.

Even that may not be enough. Since 1989, occupancy at Hilton's casinos has slipped slightly, despite cuts in room rates in both years. To lure high rollers away from other casinos, the Las Vegas Hilton has had to be more generous about extending credit--a policy that forced it to swallow $25.7 million in bad gaming debts last year. Those losses shaved 13% off operating income from gaming.

But that hasn't slowed Giovenco. "We see gaming as a growth business, for us and the rest of the industry," he says. A onetime accountant who joined Hilton's finance unit in 1972, Giovenco's only brush with glitz came in the early 1980s, when he signed up-and-coming Mike Tyson to an exclusive contract to fight all his bouts at the Las Vegas Hilton.

LOUISIANA PURCHASE? Giovenco kicked off Hilton's latest gambling push last year in Atlantic City. In 1985, New Jersey casino regulators had denied Hilton a gaming permit, arguing that it had failed to demonstrate "good character and integrity" by retaining an outside attorney with alleged ties to organized crime. The lawyer no longer works for Hilton, and last year Giovenco won the regulators' approval.

Giovenco promptly offered $165 million to buy Donald Trump's struggling Trump Castle casino, which Hilton had sold to Trump for $320 million after it had been denied a license. Trump rejected the offer, but Hilton may consider another bid for the 634-room casino and is also looking elsewhere in Atlantic City. "If they can get a cheap deal, they'll rush for it," says Al Glasgow, publisher of Atlantic City Action, a newsletter that tracks the gambling business.

Lately, Hilton has stepped up the pace. In March, it began work on a $35 million, 3,000-passenger floating casino on the Mississippi River, where six riverboats are authorized to operate under a 1991 Louisiana state law. Giovenco has also told Louisiana officials that Hilton would spend up to $400 million to build a huge casino along with the riverboat. In Reno, it has offered $79 million for Bally Mfg. Corp.'s 2,000-room hotel and 100,000-square-foot casino, the city's largest. But by far Hilton's biggest project would be the $2 billion casino and high-tech theme park that it, along with Caesars World Inc. and Circus Circus, has proposed building in Chicago.

The planned American projects would not only generate strong cash flow but also help fill rooms at some of Hilton's underused properties. Hilton's bets on U.S. gambling expansion could yet come up snake eyes, though. In New Orleans, Hilton faces heavy competition from hotel entrepreneur Christopher Hemmeter for the single casino that Louisiana legislators are likely to grant. And in Chicago, despite the 45,000 new jobs that the gaming complex promises to create, the project is strongly opposed by powerful horse-racing interests that seem to have the ear of Governor Jim Edgar.

Hilton's gambling thrust has already had one desired effect: Wall Street is taking notice. After years of tracking Hilton as a hotel company, many analysts are reluctantly admitting that Hilton is starting to look more like a gaming stock--where multiples are as much as 30% higher. At around 48, the stock has been trading near its 52-week high. "The Street perception was always that this was a sleepy giant," says Oppenheimer & Co. analyst Steven Eisenberg.

PLUSH PUSH. If it wakes up, it won't be thanks to the hotel business. For the next three years, don't expect much growth in that heavily overbuilt sector, says Los Angeles hotel consultant Saul F. Leonard. Hilton's response has been to sell off its downscale properties and concentrate on ritzy resorts that may weather the glut better. It recently signed agreements to manage a trio of Phoenix resorts. To generate business for its resorts, it has begun time-share sales. And the company is expanding its international Conrad unit by opening tony hotels in Mexico, Saint Martin, and Belgium.

Hilton management boasts that the new hotels will have the company sitting pretty once the economy rebounds. That may be. But even Carl T. Mottek, president of the company's hotel unit, concedes that gambling looks a lot more appealing for now. "You've got to go where the opportunity is," he says. That, of course, was what Del Webb was saying 46 years ago.

Before it's here, it's on the Bloomberg Terminal.