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LodgeNet Struggles to Pitch Hilton Deal

10/22/2000 8:00 PM Eastern

A week after landing a contract that would push its total domestic hotel-room base to more than 1 million, shares of LodgeNet Entertainment Corp. continued to fall, as investors struggled to come to grips with the benefits of the agreement.

LodgeNet announced earlier this month a seven-year master service agreement with Hilton Hotel Corp. that would give it access to 70,000 hotel rooms in Hilton's owned-and-operated properties in the United States. In addition, Hilton will make LodgeNet the preferred provider of interactive services to another 1,600 managed and franchised hotels in the U.S. and Canada, representing another 250,000 rooms.

The agreement will boost LodgeNet's overall hotel footprint-currently at about 700,000 rooms-to over 1 million.

LodgeNet shareholders weren't immediately captivated by the deal, driving the company's stock price down 32 percent over the past six days. LodgeNet fell $1.88 to $20 on Oct. 11, the day after the Hilton deal was announced. It continued to slide, closing at $14.88 on Oct. 17.

Hilton shares, off 56 cents each to $9.68 on Oct. 11, closed at $9.19 on Oct. 17.

Janco Partners research analyst Stacy Forbes said part of the reason for the sell-off was investor confusion over how the Hilton pact would help LodgeNet.

In announcing the deal, LodgeNet said it expected 2000 revenues of $198 million to $202 million, up from $181 million in 1999. It said cash flow would be $67.5 million to $69 million.

LodgeNet projected 2001 revenue would increase 12 to 14 percent and cash flow would rise 15 to 17 percent.

"A lot of the revenue and cash-flow numbers they [LodgeNet] put out going forward [as a result of the deal] were where a lot of analysts already were," Forbes said.

Although the Hilton partnership will not immediately increase revenue and cash flow, Forbes said, LodgeNet believes the addition of those properties significantly increases the size of the overall pie.

But for LodgeNet rival On Command Corp., which is 57 percent owned by Liberty Media Group, the Hilton pie could be shrinking a bit. On Command serves about 156,000 Hilton rooms, 72,000 of which are in franchised properties.

Forbes doesn't think the LodgeNet deal will be a big blow to On Command, however.

"They [On Command] will absolutely lose rooms, but it will be over seven years," Forbes said. Because so many of On Command's Hilton rooms are in franchised properties, she added, On Command has a good shot at keeping them on board.

"They [franchised hotels] can make their own decisions," Forbes said. "In the past, 75 [percent] to 80 percent moved over to On Command. They might have some hotels that don't want to switch."

LodgeNet's interactive-TV service, which includes on-demand movies and music, Nintendo 64 video games, Internet access over the television and other features, will be phased in at Hilton hotels during the fourth quarter. The rollout will continue as existing contracts expire, the companies said.

LodgeNet expects to add from 40,000 to 60,000 Hilton rooms per year, in addition to its internal growth of between 30,000 and 40,000 new rooms annually, the company said.

"This [agreement] accelerates our growth plans and adds a significant amount of quality rooms, making us not only the leading ITV company in the lodging industry, but the largest," LodgeNet CEO Scott Peterson said in a conference call with analysts. "This breaks the mold."

Hilton also received warrants to purchase up to 2.1 million LodgeNet shares-or 17 percent of the company-for $20.44 each.

Of those warrants, 1.5 million vest immediately; the rest vest at the rate of three shares for each additional hotel room Hilton delivers.

Hilton and LodgeNet also agreed to create a new company-called InnMedia-which would provide high-speed data and Internet content services to hotel rooms, including those outside the chain.

September