The Unhappy Campers At Itt

Shareholders are losing patience as it tries to elude Hilton

For high rollers at Caesars Palace in Las Vegas, the hot game is baccarat. For executives at ITT Corp., which owns Caesars, the game seems to be strip poker. After five months of fending off a $10.5 billion hostile takeover by Hilton Hotels Corp., ITT has either sold or is in the process of selling more than $2 billion in assets and could part with another $2 billion or so in the next few months.

The list now seems to extend to what ITT management once pointed to as the company's crown jewels. In early June, ITT admitted that it has entertained offers for some of its most lucrative properties, including The St. Regis in Manhattan and The Phoenician, near Phoenix. Knowledgeable sources say the properties ITT is contemplating selling could fetch $1.3 billion.

SCORCHED EARTH? Now, a small but growing number of key ITT investors is worrying that ITT's wheeling and dealing could seriously reduce the value of the business and drive Hilton away. On June 9, Hilton president and CEO Stephen F. Bollenbach sent a letter to ITT's board warning of just such a possibility. Already one investor, Michael F. Price, who runs Franklin Mutual Advisers and owns one million ITT shares, has hinted he would support a proxy fight at ITT's planned annual meeting in November if ITT's asset sales chase off Hilton. "If ITT really scorches the earth to get rid of [Hilton], it will still have to answer to its shareholders in November," he says. Other investors say that Soros Fund Management, an investment vehicle of superinvestor George Soros, might also support a proxy battle if Hilton gets chased off. A firm spokesman declined comment.

Price has been an activist investor in the past, most notably when he took a stake in Chase Manhattan Corp. before it merged with Chemical Banking Corp. and pressed management to do something to increase shareholder value. But ITT has a number of powerful shareholders. According to recent filings, the 10 biggest control nearly 31% of its stock. That means Hilton would need to sway few minds to elect its proposed slate of 25 directors. And investors have good reason to be frustrated. Hilton's Jan. 27 bid of $55 a share drove ITT's stock from $43 to $58.50, but it has languished since then. On June 11, the stock stood at $58.625.

ITT shareholders were comfortable with the early asset sales. But they got antsy on May 19, when ITT announced a deal to sell five Sheratons to FelCor Suite Hotels Inc. for $200 million. In the deal, ITT's Sheraton unit gets a 20-year contract to manage the hotels. But FelCor can refuse to transfer that contract to any other company. "I'm very upset by that deal," says Gordon Crawford, senior vice-president of Capital Research and Management Co., a major ITT shareholder. "It's a blatant attempt by management to sell off core assets to keep their jobs."

MUM'S THE WORD. ITT says FelCor insisted on the provision to ensure against a change in how their new property is managed. And ITT says it would consider selling its crown jewels only at a steep premium. But investors are worried that potential buyers of properties such as The St. Regis may demand the same protection.

Meanwhile, ITT isn't saying what it intends to do with the $2 billion it has raised so far from asset sales. "They had better do a self-tender or they're going to get strung up by their shareholders," warns Gabelli & Co. Chief Investment Officer Mario J. Gabelli, who controls nearly one million ITT shares.

Bollenbach says Hilton intends to stick around until November. "But that depends on what they do with the assets of this company," he says. "If they sell them off one by one, we sure won't be around." As the clamor from ITT's restive shareholders shows, patience in a takeover battle can disappear as fast as a stack of chips at a Vegas table.