Lawsuit alleges Hilton undid Roski purchase

Jul 24, 2001 8:36 AM

No one disputes that the fortunes of the Las Vegas Hilton declined sharply last year after Park Place Entertainment Inc. agreed to sell the property to Los Angeles developer Ed Roski Jr. for $365 million in a deal that later collapsed.

The $20 million dollar question now is why, and whether the sudden drop in the property’s profitability violated the terms of a July 2000 deal to sell the former playground for high rollers and venue for Elvis Presley’s last, long-running Las Vegas stand in the 1970s.

At the center of a legal battle over the failed deal is the role played by Hilton Hotels Corp., which spun off its gaming assets in 1998 to form Park Place.

A pending lawsuit filed by Roski depicts Hilton as having tried to buy back its one-time premier property and, after failing at that, working behind the scenes to scuttle the sale.

Roski is seeking to recover part or all of $20 million in various deposits and fees he lost when the sale failed to close.

Park Place, meanwhile, counters that the property’s decline did not violate its sale agreement, and that the deal fell apart because Roski could not secure the necessary financing.

Park Place Chief Executive Tom Gallagher ”” who became CEO midway through the deal after the sudden death of former company chief Arthur Goldberg ”” told Reuters the corporate conspiracy theories were without basis. Hilton declined to comment.

But if proved true in court, such behind-the-scenes moves by Hilton would constitute a disturbing ”” though not necessarily illegal or even uncommon ”” series of actions by one company trying to reassert control over one of its corporate progeny, according to corporate governance experts.

The sale was unveiled last July, when Roski said he planned to shift the 32-year-old Las Vegas Hilton away from its focus on high-end gaming and toward convention-oriented business.

Hilton was also interested in buying the property, but was not selected by then-CEO Goldberg and Park Place as the preferred buyer, according to the suit filed by Roski in U.S. District Court in Clark County, Nevada. Hilton in a separate filing denied it had expressed interest in the property. Barron opposed sale

Roski’s lawsuit cited opposition by Barron Hilton, the current Hilton chairman who was also the son of Hilton founder Conrad Hilton, as a primary reason why the hotel giant sought to scuttle the deal.

Gallagher, a Hilton executive before being named Park Place CEO, denied the existence of such opposition, and pointed out that the Park Place board ”” of which Barron Hilton was a member ”” unanimously approved the sale.

But Roski alleges that Hilton, the company, tried to scuttle the deal by adding conditions that would have made it difficult for the casino to keep the Hilton name after a sale.

The lawsuit goes on to state that then-Park Place CEO Goldberg, an independent-minded former Hilton executive who wanted to sell the casino, intervened and resolved the issues with Hilton.

“Although rebuffed in this attempt, Hilton’s desire to find ways to interfere with and prevent the sale of the hotel was unchanged ...,” the suit states.

Finances crumble

While accounts of the deal’s unraveling vary, the fact that the casino’s financial health deteriorated sharply while the deal was pending is largely undisputed.

Roski alleges that Park Place lured various executives and high-roller business away from the hotel in violation of the sale agreement, causing its operating earnings ”” earnings before interest, tax, depreciation and amortization ”” to drop from $60 million a year to almost nil in under 6 months.

Park Place says it acted within its agreed-upon right to move key staff and the high roller business to other properties.

Despite the downturn, however, Goldberg remained determined to sell the property, even as Roski was losing his ability to finance the deal because of the property’s diminished cash-generation, according to the lawsuit.

Accordingly, Roski alleges, Park Place arranged to provide $30 million in mezzanine funding to keep the deal alive.

After Goldberg’s death, the suit claims, there was a virtual takeover of Park Place by Hilton. Gallagher, then a top executive at Hilton, became Park Place’s new CEO while

Hilton’s own CEO, Stephen Bollenbach, remained as Park Place’s chairman. The departure of two Park Place board members over the next few months reduced the Park Place board to 10 members, 5 of whom had close ties to Hilton.

Roski alleges that the new administration at Park Place made it nearly impossible for him to get the $30 million mezzanine financing. No backdoor deal

Gallagher denied any suggestion of a backdoor corporate takeover, and dismissed any suggestion that he was beholden to Hilton upon taking the helm at Park Place.

“The idea that spending three years at Hilton turned me into someone who wasn’t independent was crazy,” he said in his first public comments on the suit. “I spent 10 percent of my career at Hilton and 90 percent for other people, always doing whatever was in the best interests of the company I was working for.”

Gallagher said that he initiated discussion of the funding with the intent of completing the deal. “I was the one who said we would consider the loan, but it would have to be under strict terms to assure that we would be paid and because we didn’t want to become a de facto equity holder” in the property, he said.

The deal fell apart shortly after the mezzanine loan talks broke off. Park Place has since said it does not intend to sell the property and will focus on building its business back up.

While it is far from clear that Hilton played an active role in the deal’s demise, Roski’s allegations ”” if true ”” would constitute a questionable action that could have sent the wrong message to Park Place shareholders, corporate governance experts said.

“We advocate that if companies are publicly traded that you get a majority of independent outsiders so there is no relationship or affiliation between the two companies,” said Peter Gleason, vice president of research for the National Association of Corporate Directors. “The goal is to have a majority of independent outsiders on the board so there is not situation like this.”