HILTON—Hilton Chief Insists Hotel Chain Remains Sound Amid Downturn

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Normally Stephen F. Bollenbach, the 59-year-old chief executive of Hilton Hotels Corp., keeps a low profile. On any given day, he works in his office, tucked away in a non-descript building on a Beverly Hills side street. Or he is somewhere around the world visiting the 2,000 hotels in the company’s chain.

But these are not normal times, and the white-haired executive, who grew up in Lakewood, has been on a PR campaign to assure investors that despite a struggling stock, low occupancy levels and a possible downgrading of the company’s bonds, things are not that bad.

Bollenbach insists that Hilton’s business will return to an even keel early next year. He even brags that the renovation of the company’s 2,000-room hotel near San Francisco’s Union Square will be accelerated while occupancy rates remain unusually low there.

He has refused to join other hotel executives in seeking federal handouts for the industry. “Bottom line, we don’t need the money to keep in business,” he said. The only hitch in Hilton’s stride has been the postponement of a $200 million investment in two timeshare projects in Las Vegas and Orlando, Fla.

“Basically our theory is that there will be a short period of dramatic decline in our business, but the recovery will be fairly quick and by the first part of 2002 we should be back in a position where we would have been otherwise. The year 2002 ought to look a lot like 1999, which was a really good year in the hotel business,” Bollenbach said in an interview last week.


If it doesn’t work out that way?

“We don’t really have a second plan,” he said.

A bold stance, given the hotel industry is one of the most precarious sectors in the U.S. economy.

“I think things are pretty unhealthy for the entire hotel sector,” said industry analyst John Arabia of Green Street Advisors in Newport Beach. “Currently investors have dramatically different viewpoints on where this sector is heading.”

Hilton’s stock plummeted to a near 10-year low of $6.15 (adjusted for dividends) on Sept. 21. By last Thursday (Oct. 11), it had recuperated to $9.25. The company’s bonds also have been put on credit watch for a possible downgrade to junk status.

But in typical fashion, Bollenbach remains coolly confident.

“He’s always been like that,” said Joseph M. Kampf, president and chief executive of Anteon Corp., an information technology company in Fairfax, Va.

In the 1970s, the two men worked at the Ludwig Group, where Bollenbach was chief financial officer. The privately held company was owned by shipping magnate D.K. Ludwig, who at the time was considered the richest man in the world. “We had all kinds of crisis issues and business issues to work on,” Kampf said. “Steve was always in control of his own personality.”

At one point, the Ludwig Group built a forest-products company in the Amazon jungles of South America. Bollenbach engineered bank financing for a pulp plant, which was built in Japan, and arranged for it to be transported 13,000 miles by ocean-going barges. “I think that level of activity in that rough an environment prepped him for everything else that came afterward,” Kampf said.


Senior-level experience

After leaving Ludwig, Bollenbach worked in financial positions for other high-profile executives, including Walt Disney Co. Chairman Michael Eisner, Donald Trump and Bill Marriott. As Disney’s chief financial officer, Bollenbach is credited with convincing Eisner to purchase Capital Cities/ABC for $19 billion. At Marriott, he split off the company’s services operation, Host Marriott, from its hotel group, then served as the spin-off’s chief executive.

When he joined Trump Organization in 1990, the real estate empire was teetering near collapse. “Steve came on with me, and we were able to work out all the problems,” Trump said. “All of the banks were happy, and I was happy. He had great respect from the financial community.”

Bollenbach’s demeanor belies a highly involved management style. He won’t claim to know what the future holds for the hotel industry, but Trump wouldn’t bet against him. “He has a great understanding of where markets are going,” Trump said.

And Bollenbach seems willing to adjust. Every day, he tests his theory of a 12-week rebound against actual results. When pressed, he reveals contingency plans that don’t surface in his early comments. Besides holding off on the timeshare projects, Bollenbach admits he would shy away from opportunistic hotel-property purchases if the market failed to rebound.

Hilton’s third-quarter results and financial outlook will be released on Oct. 23. Bollenbach wouldn’t discuss them, but there clearly will be challenges. The company has said that September occupancy rates fell by 20 to 25 percentage points at company-owned hotels. By early October, things had recovered some on track to meet Bollenbach’s rebound prediction but at between 60 and 66 percent, occupancy was still depressed compared with early September.

His past moves have put the company in decent position to weather a storm. The acquisition of Promus Hotel Corp. and its Embassy Suites, Doubletree and Hampton Inns names added $1 billion in debt to the balance sheet, but Hilton paid it down aggressively during good times.

As of June 30, Hilton’s total debt stood at $4.97 billion, down from $5.5 billion at the end of 1999.

A bond downgrade would increase the interest rate that the company pays on some of its existing bank debt, which carries a variable rate tied to the bond rating. Analysts agreed the extra interest expenses would be insignificant.

Bollenbach wants to continue to grow the franchise and management businesses, as they require little capital investment and the value of each Hilton-owned franchise increases with the size of the chain.

“He’s been investing when everyone else is pulling back,” said Kampf. “Not a bad strategy.”

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