Opening doors

London/New York, Dec. 30 (Reuters): Hilton Hotels Corp on Thursday said it would buy its British namesake’s hotel operations for ?3.3 billion ($5.7 billion), propelling it into the ranks of rivals with global operations.

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

Hilton Hotels, which also operates brands like Embassy Suites and Doubletree, 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.

But executives at Beverly Hills, California-based Hilton, said the strategy of divesting owned hotels would remain.

“We want to continue getting out of the real estate business and more into the fee business,” said chief executive Stephen Bollenbach.

Hilton Hotels shares surged 7.6 per cent to close on the New York Stock Exchange at $24, their highest level in more than four months.

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

Hilton Group Plc 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 Inc is thought to have eyed up UK-based Intercontinental Hotels Plc.

Other North American chains could now feel the 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 Inc 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.

The two Hilton groups already share an alliance to cover joint marketing, reservations and loyalty programs.

“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 Corp and Hilton Group.

Bollenbach said the international deal offers “a wonderful growth opportunity” for brands like Embassy Suites, Hilton Garden Inn, and Doubletree that have so far been confined to North America.

“As a domestic company, our stock price was valued lower than companies, like Starwood, that have a larger international presence,” he said.

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 agencies were expected to downgrade the company’s debt to junk.

“We like to have an investment grade ... now one of our objectives is to grow income and pay down debt,” Bollenbach said.