ITT to Split Into 3 Companies in Effort to Derail Hilton Takeover

ITT Corp., which owns the Sheraton hotel chain and Caesars Palace in Las Vegas, said Wednesday that it will break up into three companies and buy back $2.1 billion in stock as part of a dramatic plan to foil an unwanted takeover by Hilton Hotels Corp.

The sweeping reorganization--which would complete the dismantling of what was once one of the nation’s largest corporate conglomerates--left executives at Beverly Hills-based Hilton angry and scrambling to examine their financial and legal options.

“This recent ITT move reflects a value-destructive ‘anybody-but-Hilton’ attitude,” Hilton President and CEO Stephen Bollenbach said in a statement.

Bollenbach can choose to continue to fight by raising Hilton’s $10.5-billion bid for all of New York-based ITT or wait and make a run for the new ITT lodging and gaming company created by the breakup. But in light of ITT’s most recent maneuvers, a takeover might now prove too costly and problematic to accomplish, industry analysts said.

“It looks like this time ITT has escaped the bullet,” said hotel and gaming analyst Joseph V. Coccimiglio.

Under the reorganization approved by ITT’s board, the company would spin off its Sheraton hotel chain and Caesars World gaming operation into a new company called ITT Destinations Inc., which would be headed by current ITT Chairman Rand V. Araskog and current ITT President Robert A. Bowman. Another new company--ITT Educational Services Inc.--would include the company’s chain of 60 vocational schools.

The existing ITT Corp. will focus on publishing telephone directories. After the split, ITT has agreed to sell a substantial minority stake in the publishing company to the New York investment firm of Clayton Dubilier & Rice Inc. for $225 million in cash.

The breakup, which is subject to government approval, is expected to be tax-free and completed by the end of September, according to ITT executives.

Existing ITT shareholders would get a stake in the three companies.

In addition, ITT today will start to buy back about 25% of its common stock at $70 a share. Later this summer, the company plans to repurchase $2 billion in debt from bondholders.

The purchases of stock and debt will be financed in part by the approximately $1.5 billion ITT has raised from the sale of assets--such as its stake in the New York Knicks basketball team--that has taken place since Hilton launched its cash, stock and debt offer in January.

“Separating our lodging and gaming operations from ITT’s other remaining assets is in keeping with our goal of creating current value for ITT shareholders while enhancing the long-term prospects and strategic opportunities for each business,” Araskog said in a statement.

Wall Street reacted enthusiastically to the announcement. ITT shares closed up $4.31 at $66.94 on the New York Stock Exchange. Hilton shares rose 31 cents to close at $29.31, also on the NYSE.

ITT also reported second-quarter earnings Wednesday. Net income more than doubled from the same period last year to $199 million. The quarterly results were boosted in large part by an after-tax gain of $116 million on the sale of ITT’s stake in Madison Square Garden. The company also posted a $5-million provision to cover the costs of fighting the Hilton offer.

Some analysts said Hilton, which owns a small ITT stake, may go to court to try to block the breakup because ITT did not seek shareholder approval for the reorganization. ITT sought such approval during a reorganization in 1995, when it spun off its financial and manufacturing operations into new companies. But ITT spokesman Jim Gallagher said shareholder approval is not legally required .

If Hilton continues to fight, it will most certainly have to raise its current offer, which includes $55 a share in cash and stock--for a total of $6.5 billion--and the assumption of $4 billion in debt. Industry analysts say the company will have to boost the offer to at least $70 a share and perhaps as high as $80 to remain competitive. But those prices would raise concerns that Hilton might be paying too much for ITT.

Hilton also might run up an enormous tax bill if it sold some ITT operations--such as the phone book division--after a takeover. In contrast, ITT can now spin those off tax-free.

Hilton will also find it much harder to oust ITT’s 11-member board with its own slate if the breakup is completed. Currently, ITT’s entire board will be up for election during the next meeting, making it possible to replace the board all at once. However, under the breakup plans, only four directors of ITT Destinations--the new hotel and gaming company--would be up for election, leaving potential Hilton board members in the minority.

“There are a lot of questions that need to be answered . . . before we can make a determination and say what our next steps are,” Hilton spokesman Marc Grossman said.