Some thought that a £645 million hotel bill was overdoing it; then they saw that Cyril Stein had played a masterstroke. Chris Blackhurst reports.
It is enough to make the greatest of tycoons green with envy. In October 1987 Ladbroke paid £645 million for the Hilton hotels outside the United States. Today, less than four years later, they are worth £2.5 billion. Admittedly, Ladbroke now runs 150 hotels under the Hilton banner, as opposed to the 93 acquired in 1987. Nevertheless, it almost defies belief: a profit of £2 billion in less than four years. Think about it. Even the man who pulled off this remarkable coup has to pinch himself occasionally to make sure that he is not dreaming. Normally the most reticent of individuals - especially when talking to the press - Cyril Stein, Ladbroke's chairman, cannot conceal his delight. "It's not just the best deal I've made," he laughs, "it's the best deal anyone has ever made."
In the early 1970s, with Stein at the helm, Ladbroke decided to move into hotels. "It was a counterbalance for betting," he explains. While betting was a highly profitable business, its assets never increased in value. Run successfully, hotels could provide both: profits and appreciating assets.
Ten years later the 65-strong Ladbroke Hotels was number two in the UK, behind Trusthouse Forte. But it was not enough. "We'd built it up as far as we could," says Stein. "While Ladbroke Hotels was a national brand, it wasn't international. If we were going to go international, it was obvious we needed an established brand name." And he adds: "Of those names, one, Hilton, was head and shoulders above the rest." His break came in 1986, when TWA, Hilton's owner, put Hilton International, the hotels outside America, up for sale. Stein did not hesitate. Charterhouse, Ladbroke's merchant banker, was ordered to find out what it could from TWA while his staff checked out the hotels.
They liked what they saw. But when it came, Ladbroke's bid of £640 million was too little. In a race dominated by airlines and hotel combines, the British group came nowhere. Subject to the ratification of its board, KLM would walk off with the prize.
Then Stein had his first stroke of luck: the Dutch airline's board refused to approve the deal. His hopes were short-lived, however - Hilton went to the second highest bidder, United Airlines. The hotel business fitted nicely with the US carrier's plan to form a vertically integrated travel group (it also owned a car hire operation). Then Stein had his second piece of luck: unions and corporate raiders on the share register, who wanted to see the group broken up, opposed the idea. United put Hilton International back on the market.
Stein leapt at the chance. He offered £645 million, cash. An earlier £294 million rights issue had given him some of the money; the rest would come from borrowings.
There was nothing lucky about his next move. It was a master-stroke. In September 1987, four days before a United board meeting, Stein flew to New York. He threw down the gauntlet: either he signed on the dotted line in four days' time or Ladbroke pulled out.
His competitors were shocked into action. Four days of intensive lobbying followed. But while they could easily beat Ladbroke's price, they could not do it immediately nor could they do so in cash. Another factor worked in Stein's favour. In 1986 Ladbroke's previous bid of £640 million had fallen £100 million short of United's winning $1 billion. But by the autumn of 1987 the pound had strengthened, pushing Ladbroke's offer close to $1.1 billion and giving United a profit of $100 million.
When the deadline dawned, Ladbroke's executives and advisers assembled at Charterhouse in London. While Stein waited in New York for a decision, two press releases were prepared. One, just two lines long, said that Ladbroke had pulled out of the running. The other, much longer, set out the terms of the purchase.
Five minutes after the deadline passed (this short delay was his only concession) Stein signed.
When the deal was announced the following day, Ladbroke's shares fell. Then it began to sink in: overnight, Ladbroke had gone from being a UK leisure company to an international group with a hotel in every major city in the world. By the close the shares had bounced back.
Stein denies that he "stole" Hilton. He knew the company well and could pay in cash. And besides, the later success of transferring the Hilton brand to Ladbroke's UK hotels (they now go under the Hilton National name) could not have been foreseen.
All of which is true. But in its first year in the group, Hilton contributed around $100 million towards Ladbroke's profits. Shortly before the end of that year Grand Metropolitan put its Inter-Continental hotels up for sale. The asking price for the chain, which had annual profits of around $50 million, was more than $1 billion.
Stein smiles and refuses to be drawn into making a comparison between this valuation and the price that he paid for the Hilton hotels when he took advantage of what he calls "a once-in-a-lifetime corporate opportunity" but which others enviously dub "daylight robbery".
(Chris Blackhurst is City editor of the Sunday Express.)