Hilton buys UK lodging business for $5.7 bn.

Hilton Hotels Corporation is to acquire the lodging assets of Britain’s Hilton Group plc for approximately GBP 3.30 billion (or $5.71 billion) in an all-cash transaction. This equates to a purchase price multiple of 11.3 times pro forma 2006 Adjusted EBITDA. The purchase price assumes a USD/GBP exchange rate of $1.73:GBP 1; the USD amount may change depending on the exchange rate at closing.

The transaction is expected to close in the first quarter of 2006. Consummation of the transaction is subject to a number of conditions, including receipt of certain competition and governmental clearances, and the approval of Hilton Group (known collectively as “Hilton International” or “HI”) shareholders.

Hilton Group will retain its gambling and betting business and is expected to be renamed Ladbrokes plc.

Upon completion of the transaction, Hilton Hotels Corporation will be the largest and most geographically diverse lodging company in the world, with nearly 2,800 hotels and 475,000 rooms in 80 countries, operating under the industry’s most respected brand names, including Hilton, Conrad, Doubletree, Embassy Suites, Hampton Inn, Hilton Garden Inn, Homewood Suites by Hilton, Scandic and Hilton Grand Vacations Club.

Included in the acquisition are 40 hotel properties currently owned by HI (most of which are in the UK and Europe,) 200 leased properties, approximately 160 fee contracts (mostly management contracts) and approximately 80 LivingWell Health Clubs (most of which are managed.) HHC will also acquire in the transaction full ownership of Hilton HHonors Worldwide and Hilton Reservations Worldwide, which have been 50/50 joint ventures with HI and managed as part of the strategic alliance between HHC and HI.

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HHC will also obtain worldwide ownership of the luxury Conrad Hotels brand, which has operated as a joint venture between the two companies since 2002.

On a pro forma full year basis (assuming the transaction closed December 31, 2005,) the combined entity is expected to have 2006 Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of approximately $1.7 billion, and be accretive to HHC’s expected stand-alone 2006 earnings.

“This transaction represents the final and logical step in a process that began in 1997 with the signing of our strategic alliance, and is a unique opportunity to once again position HHC as a global lodging industry leader for the first time in more than 40 years,” said Stephen F. Bollenbach, HHC co-chairman and chief executive officer.

“With the current strength of our business in the U.S., our strong balance sheet, the beginning of a hotel industry recovery in the U.K. - which accounts for about a third of HI’s income - and the success we’ve had in working together with HI for eight years on such programs as Hilton HHonors, Hilton Reservations, Conrad development and technology initiatives, the time is right to put these two great organizations together.”

David Michels, chief executive of Hilton Group plc, said: “I am very proud of the Hilton brand, which has consistently been acknowledged as one of the world’s leading brands. Our customers can look forward to enjoying even more opportunities as a result of the combined strengths of the brands.”

HHC noted that the strategic benefits of the transaction include:

—making HHC a true global company and competitor;


—enabling the company to fully control the flagship Hilton brand - the most powerful brand in the industry - on a worldwide basis;


—opening expansion opportunities for all Hilton Family brands in all parts of the world;


—opportunity to implement its OnQ system throughout the world;


—enhancement of the company’s portfolio, including a number of world-class resorts;


—diversification of earnings and cash flow outside the U.S., and


—further stabilizing earnings by increasing income from managing, leasing and franchising.

The company anticipates significant growth opportunities for its worldwide system for many of its brands through franchise and management agreements.

The current HI development pipeline consists of signed contracts for 58 hotels with 14,000 rooms. HHC’s development pipeline currently consists of 520 hotels and approximately 64,000 rooms.

“Brand development is becoming a more accepted concept internationally, providing exciting opportunities for all our brands in many important markets around the world,” Bollenbach said.

“There is an appetite among global hotel owners for strong brands in the full-service, focused-service and all-suite segments, and our brand portfolio is uniquely positioned to fill that need.”

Consistent with its successful asset disposition strategy in the U.S. - which has resulted in 20 hotels being sold year-to-date for a total of more than $1 billion - while retaining long-term management or franchise contracts, HHC plans to continue the international asset disposition program currently being undertaken by HI, retaining management or franchise agreements. Proceeds from asset sales completed by HHC after the transaction will be used to repay debt.

The transaction will be financed with cash on hand at the time of the closing (estimated to be approximately $1.2 billion,) and a new bank facility. The financing is led by Bank of America and UBS.

The combined company will be headquartered in Beverly Hills, California, with Mr. Bollenbach as co-chairman and chief executive officer, Matthew J. Hart as president and chief operating officer, Robert M. La Forgia as senior vice president and chief financial officer, and the remainder of the HHC senior management team remaining in their current positions.

Ian R. Carter, currently chief executive of Hilton International, will join HHC as executive vice president and chief executive officer of Hilton International, with responsibility for managing international operations reporting to Mr. Hart. Thomas L. Keltner, executive vice president and president of HHC’s brand performance and development group, continues reporting to Mr. Hart in that position.

HHC anticipates retaining the majority of HI’s operating and development team as well as other executives.

Concurrent with signing the agreement, Mr. Michels resigned his position on the Board of Directors of HHC, and Mr. Bollenbach resigned his position on the Board of Hilton Group.

“HI has an experienced and talented team of professionals with unsurpassed knowledge of international markets, and as we have come to know and work with them during the successful eight years the alliance has been in place, we are excited about the role they and our existing management team will play in the future growth and prosperity of our company,” Bollenbach said.

While many operational efficiencies have already been realized through the strategic alliance, HHC does expect to realize approximately $30 million in annual cost savings going forward. HHC also anticipates realizing a number of revenue enhancing synergies, primarily from new opportunities to grow its brands on a global basis, and worldwide implementation of HHC’s proprietary “OnQ” technology system.

After creating the industry’s first global lodging company under the leadership of company founder Conrad N. Hilton, HHC spun off its international business to shareholders in 1964.

That business went through a number of owners, ultimately being acquired in 1987 by U.K.-based Ladbroke Group PLC. In 1997, Mr. Bollenbach - who had become HHC’s CEO in 1996 - forged a strategic alliance with HI (the lodging subsidiary of Ladbroke) creating joint ownership of the Hilton HHonors guest loyalty program and Hilton Reservations Worldwide, and cooperative sales and marketing programs, presenting to the traveling public a united “Hilton” brand on a worldwide basis.

Acknowledging the strength of the alliance and the Hilton brand name, Ladbroke subsequently changed its name to Hilton Group plc.

“As the alliance developed, benefiting both companies and our millions of global customers, we always envisioned the formal coming together of Hilton’s domestic U.S. and international businesses,” Bollenbach said.

“The enthusiasm of both companies’ Boards of Directors for making the new worldwide Hilton Hotels Corporation a reality has been a key element in this transaction, which we are confident will bring value to our guests, our team members, our owners and our shareholders for years to come.”

HHC’s lead advisor was UBS Securities LLC, with Bank of America Securities LLC and Morgan Stanley as co-advisors.

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