BUSINESSWEEK ONLINE : NOVEMBER 3, 1997 ISSUE
INSIDE WALL STREET

Hilton May Bet On MGM Grand

Suddenly, there's a buzz about MGM Grand (MGG), the Las Vegas operator of the world's largest hotel-casino and theme-park complex. Some money managers are loading up on MGM shares--and not just for the improving fundamentals. What's the scoop?

These pros are convinced that Hilton Hotels CEO Stephen Bollenbach has switched his sights to MGM, after being outbid by Starwood Lodging Trust in his quest for ITT. Starwood agreed to buy ITT for $9.8 billion in cash and stock, or $82 a share, and assume its debt of $3.5 billion. Hilton had bid $70 a share.

Hilton's Bollenbach, whose close friends say was ''shocked'' by the Starwood-ITT pact and ''hopping mad'' about losing out, says he isn't making a counteroffer for ITT. One senior Hilton executive says: ''We must do something quick--and big--and good for shareholders, or lose face.'' The next deal ''must be a friendly deal. We'll be prepared to pay top dollar and not make the same mistake [of underbidding].''

Enter MGM Grand. Bollenbach has been in touch with MGM CEO Kirk Kerkorian, says this insider, and more talks are expected. Kerkorian holds close to 62% of MGM's stock through Tracinda, which he owns. The stock is trading at 43.

One investment banker puts the buyout value of MGM, with a market cap of $2.4 billion, at $4 billion to $4.6 billion--or 70 to 80 a share. He expects Hilton's offer to top 70.

Would Kerkorian be willing to sell at that point? ''He has always been a savvy trader--and he isn't likely to reject a $70 bid,'' says the banker.

At its current price, ''MGM has the lowest valuation of the large-cap casino companies,'' says Harry Curtis, an analyst at Smith Barney. The stock's current price, says Curtis, does not credit the company for ''its strong balance sheet, which could be used to engineer growth.'' On Oct. 22, MGM posted record earnings of 63 cents a share for the third quarter, vs. 46 cents a year ago. For all of 1997, Curtis expects $2.19---and $2.40 for 1998, vs. last year's $2.04.

''The strategic fit between Hilton Hotels and MGM Grand is a natural,'' says one big investor. MGM's plans include building resorts in Atlantic City and Detroit. In Australia, MGM operates a hotel-casino in Darwin. It also has started operations in South Africa. MGM's flagship property in Las Vegas includes a hotel with more than 5,000 rooms, a large casino, and a movie-related theme park. MGM also owns 50% of the popular New York-New York Hotel & Casino in Las Vegas.

MGM spokesman Jack Leone declined comment. Hilton's Marc Grossman says Hilton ''continues to keep its eyes open for great opportunities.''


BY GENE G. MARCIAL

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