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The Honolulu Advertiser
Posted on: Sunday, February 3, 2002

Investors backing Hilton Hotels CEO's innovative worldwide expansion

By Jeannine DeFoe
Bloomberg News Service

BEVERLY HILLS, Calif. — Hilton Hotels Corp. Chief Executive Stephen Bollenbach stood in front of dozens of employees in a New York Hilton ballroom in September and predicted the hotel industry would rebound in 12 weeks.

Bollenbach, 59, promised to keep from firing workers and is plowing ahead with plans to open 160 hotels this year. It was a bold strategy: Rivals Marriott International Inc. and Starwood Hotels & Resorts Worldwide Inc. were preparing thousands of job cuts and reducing development budgets.

If Bollenbach's plan to "manage for recovery," turns out right, the Beverly Hills, based hotel company will be in position to outperform peers once travel picks up. Otherwise, all the owner of New York's Waldorf-Astoria and Honolulu's Hilton Hawaiian Village will have to show for its efforts is a bloated cost structure, investors and analysts said.

"He'd be a hero, he'd be pounding his chest," said Mark Foster, chief investment officer at Kirr, Marbach & Co., which owns 578,000 Hilton shares. "It will certainly be a feather in his cap." If not, "then he'll have some questions to answer."

The Sept. 11 attacks, combined with a contracting economy, reduced business and leisure travel. Revenue per available room fell 6.7 percent for the industry in 2001, the biggest drop in 34 years, and will decline 0.2 percent this year, according to PricewaterhouseCoopers.

Hilton last week said fourth-quarter net income fell to $4 million, or 1 cent a share, from $64 million, or 17 cents, a year earlier. Revenue declined to $875 million from $662 million. Analysts expected the company to break even on a per-share basis, according to Thomson Financial/First Call.

So far, investors are backing Bollenbach. Hilton's shares are up 51 percent since September, topping Marriott's 22 percent gain and a rise of 49 percent in the shares of Starwood, which owns the Westin and Sheraton chains.

Hilton shares have room to move higher. The shares trade at eight times expected 2002 cash flow, while Marriott and Starwood are both at nine times, said Lehman Brothers analyst Joyce Minor.

"If Hilton can show consistency over the next couple of quarters, there's a possibility the gap narrows" between Hilton and Starwood and Marriott, said Minor, who rates Hilton "market perform" and Starwood and Marriott "strong buy."

Bollenbach was out of the country and unavailable for comment, according to a spokesman. The company's chairman is Barron Hilton, son of company founder Conrad Hilton.

Bollenbach has managed through tough times before. As chief financial officer of hotel and casino company Holiday Corp. in the late 1980s, he fended off a hostile bid by developer Donald Trump. Trump was so impressed he hired Bollenbach, who then reached an agreement with Trump's creditors that let Trump avoid bankruptcy.

From there, he joined Marriott International Inc. and oversaw the company's split into a hotel management company and a real estate company. In May 1995, Bollenbach became chief financial officer of Walt Disney Co. He joined Hilton nine months later.

At Hilton, he has made the company less dependent on its urban properties like the Waldorf-Astoria and Palmer House in Chicago by acquiring more midpriced hotel chains such as Doubletree and Hampton Inn.

He also expanded the company's fee-based franchising operations, which aren't as susceptible to swings in the economy as owning hotels.

Hilton now gets about 65 percent of its earnings before interest, taxes, depreciation and amortization from its owned hotels, down from 85 percent in 1999, said spokesman Marc Grossman.

Bollenbach was paid $2.95 million in salary and bonus by Hilton in 2000, up from $1.06 million in 1999.

Some analysts said they believe the shares of Hilton and other hotel companies may still be overpriced.

"The rebound in demand for these companies will come with a rebound in corporate travel," said UBS Warburg analyst Keith Mills, who rates Hilton shares "hold." "We do not anticipate that happening until the end of this year."