Promus Companies, Inc.

views updated

Promus Companies, Inc.

1023 Cherry Road
Memphis, Tennessee 38117
U.S.A.
(901) 762-8600
Fax: (901) 762-8637

Public Company
Incorporated: 1954 as Holiday Inns of America, Inc.
Employees: 23,000
Sales: $1.03 billion
Stock Exchanges: New York
SICs: 7011 Hotels, Motels; 7999 Amusement and Recreation Nee

Promus is one of the United States’ leading hotel and casino companies, although it is known to the public mainly through its subsidiaries, which include Harrah’s, Embassy Suites, Hampton Inns, and Homewood Suites. Until 1990 Promus had been known as the Holiday Corporation, named for its largest subsidiary, the Holiday Inn hotel chain. But that year, the British brewing company Bass plc purchased the hotel chain, prompting the Holiday Corporation to change its name to Promus.

Since that time, Promus has continued to expand in the profitable casino gambling industry (called “gaming” by its proponents) and through a number of niche-market hotel chains. The company’s success in these areas has come despite anemic growth in the hospitality industry in general.

Promus got its start after World War II, when the American economy launched into an unprecedented era of growth. With the proliferation of affordable automobiles, cheap gas, and the development of a national highway system, families began taking vacations in their new cars. With encouraging slogans like “See America first,” and “See the USA in your Chevrolet,” tourists set out to see the corners of the country. Kemmons Wilson, a Memphis-based real estate developer, saw the rise in automobile tourism as an opportunity to create a huge market for a chain of motor hotels, dubbed “motels,” to be strategically located along major highways. In 1952 he built the first of these lodges in Memphis and called it Holiday Inn.

Wilson built additional motels along frequently travelled routes and designed them as affordable stopover locations for those on route to their destination. The Holidays Inns used a uniform color scheme and a trapezoidal neon sign that soon came to signify a clean, comfortable room with few amenities. In fact, many of the hotels shared the same blueprints; thus, customers knew exactly what to expect at each location. To support the growth of the chain, Wilson created a holding company called Holiday Inns of America, Inc., in 1954. The firm managed financing and franchise agreements and worked to maintain uniform standards of cleanliness and service. First-time lodgers were queried on their destinations, allowing Holiday Inn to determine the best locations for additional hotels. It also gave the chain an opportunity to advise travelers of the location of other Holiday Inns along the way.

Holiday Inns of America went public in 1957, assuring the growing company access to private investors. The share issues were well received, helping Holiday Inn to accelerate construction across the country. This vast expansion was made possible by President Eisenhower’s massive interstate highway project. Existing mom-and-pop motels, the primary competition for Holiday Inns in the early years, found themselves by-passed by the new freeway systems and went out of business.

In 1963, with hundreds of Holiday Inns now dotting the map, Wilson’s company gained a listing on the New York Stock Exchange, giving it access to institutional investors. This allowed Wilson to develop Holiday Inns in other countries and make improvements on existing motels. Restaurants and swimming pools were added. Gradually, the chain shed its motel image in favor of a more upscale roadside hotel.

Wilson, who was credited with inventing the concept of hotel franchising, witnessed the opening of the 1000th Holiday Inn in 1968. A year later, hoping to diversify into related businesses, Holiday Inns of America acquired the Trailways bus company and Delta Steamship Lines. These companies funnelled tourists to Holiday Inns on package deals. After acquiring these companies, the parent company changed its name to Holiday Inns, Inc. Holiday Inns’ growth slowed slightly during the 1970s as other hotel chains entered the market. In addition, much of the interstate highway system had been completed, and the market began to level off. The growth of airline traffic also affected Holiday Inn by limiting the number of vacationers and businesspeople who traveled by car. To combat this trend, Holiday Inns were established near airports, where customers could easily catch flights.

Kemmons Wilson retired in 1979 and was succeeded as chairman and CEO by Roy E. Weingardner. He and the company’s new president, Michael D. Rose, made the first of many bold shifts in Holiday Inns’ growth strategy that year by acquiring a 40-percent interest in River Boat Casino, a gambling operation located next to the Holiday Inn in Las Vegas.

The company also acquired Perkins Cake & Steak, a growing chain of family restaurants formulated on the same strategy as Holiday Inn—identical establishments with similar menus and uniform quality standards. During this time, Weingardner and Rose decided to sell off the Trailways bus business because bus travel had fallen out of favor with travelers.

By far the boldest change in Holiday Inns’ strategy came in February 1980 when the company acquired the Harrah’s hotel and casino business. Harrah’s was established as a bingo parlor in Reno, Nevada, in 1937 by Bill Harrah. At the time Nevada was the only state in the country where gambling was legal. The bingo operation netted Harrah a modest income, which he used to establish a larger operation, Harrah’s Club, in 1946.

In 1955 and 1956, Harrah took over several clubs in the town of Stateline, on the Nevada side of Lake Tahoe. In 1959 Harrah expanded his Lake Tahoe operation, adding new games and luxurious parlors that were frequented by the rich and famous. In competition with casino operators in Las Vegas, Harrah rapidly expanded his properties, with an 8500-square foot addition at Lake Tahoe in 1964 and a 400-room hotel tower and club in Reno.

Harrah’s company went public in 1971, and the following year it gained a listing on the American Stock Exchange. Offering a beautiful resort destination, premium quality accommodations, gambling, and top name entertainment, Harrah’s became synonymous with high living. It was also a terrific investment. Unencumbered by the alleged gangster reputations in Las Vegas, Bill Harrah cultivated a strong reputation for financial responsibility and excellent management.

The listing helped Harrah to finance additional expansions at Lake Tahoe in 1973 and 1976. But Harrah died in 1978, leaving the company with a more consensus-oriented leadership. That year, the company’s board elected to build a hotel and casino in Atlantic City, New Jersey, where gambling had recently been legalized. For the first time, Harrah’s would compete in the same city as the Las Vegas interests.

Although Harrah’s remained profitable, it lacked a strong leader. Concentrated in only three markets and in a narrow line of business, the company needed to diversify. That opportunity came in 1980 when Holiday Inn offered to purchase Harrah’s.

In November of that year, Harrah’s opened a 506-room hotel in Atlantic City, which included a 44,000-square foot casino. When Michael Rose succeeded Weingardner as CEO of Holiday Inn in April 1981, he spun off the Delta Steamship company and purchased the 60 percent of River Boat Casino the company did not already own. Management of the casino was turned over to Harrah’s.

Meanwhile, Holiday Inns’ image began to falter and it faced increased competition from chains such as Ramada, Marriott, Hilton, and Hyatt, who were eating away at Holiday’s middle-market traveller.

Rather than remake the Holiday Inn image, Rose launched two new hotel chains in an attempt to corner the up-and-coming niche markets. The Embassy Suites chain, featuring only suite-sized hotel rooms, was created in February 1983. Shortly after, the company founded Hampton Inns, a chain of budget hotels. Both chains became operational in 1984. That year the parent company acquired Granada Royale Hometels, another suite chain, and merged it with Embassy. In 1985 it acquired a 50-percent interest in the Brock Residence Inn chain.

Holiday Inns, the parent company, underwent several changes in 1985. Rose, who succeeded Weingardner as chairman in 1983, oversaw the issue of 6.3 million new shares of stock, which were purchased by the corporation. In May, shareholders approved a name change to Holiday Corporation, and in July a new world headquarters in Memphis opened. In November, the Holiday Corporation sold its interest in Perkins to the Tennessee Restaurant Company in exchange for an equity share in the company.

In 1986 developer Donald Trump announced he had acquired five percent of Holiday Corporation shares in an apparent takeover attempt. Trump was drawn by the fact that a 1983 appraisal valued the company at $2.7 billion. While the company’s worth had appreciated, its market value was only $1.5 billion. Rose responded with a brutal poison-pill defense. He arranged a leveraged recapitalization in which the company took on a staggering $2.4 billion in new debt—half of it in junk bonds. Two thirds of the money was used to pay a $65-per share dividend, but now Holiday Corporation had a negative net worth of $800 million, rendering it an unattractive takeover target. Trump took the huge dividend, cashed in his stock, and went away.

The recapitalization left Holiday’s top managers with a ten percent share of the company (Rose himself held 2.3 percent). The company sold its interest in Residence Inns and opened the new Bill’s Casino in Lake Tahoe. In March of 1988 it also founded a fourth hotel chain aimed at extended-stay travellers called Homewood Suites. Harrah’s and the company’s other new chains were doing very well, but the Holiday Inns group appeared to be doomed.

The Holiday Inn hotels were aging and in need of renovation, which many franchisees could not afford. The hotels’ deterioration served to increase the public’s perception that the chain was past its prime. Earnings from the division were dropping fast. By contrast, the gambling operations were growing quickly but required additional investment to take advantage of the rising demand. Rose decided to unload the Holiday Inn chain at any cost.

In May 1988 he found a buyer in Bass plc, a UK-based brewing conglomerate seeking diversification. The company sold 13 U.S. Holiday Inns and a number of international hotels to Bass for $475 million. Additional asset transfers continued until the entire Holiday Inn business had been acquired by Bass in January of 1990, for a total of $2.2 billion, much of it in the form of debt assumptions.

In preparation for the transfer, Rose created a new holding company for the non-Holiday Inn assets. This company, established in November 1989, was called “Promus,” Latin for “one who serves.” When the deal with Bass was completed, Promus became the sole parent company of Harrah’s and the three new hotel chains.

Following the sell-off of the Holiday Inn chain to Bass, Promus shareholders were paid a special $30-per share dividend. The company was now a third smaller, with annual revenues of about $1 billion. The sale freed Promus of future costs on more than 1,500 hotels and the suffocating debt it took on to repel Trump, while providing millions of dollars for investment in the Harrah’s chain.

No longer worried about cannibalizing business from its Holiday Inn chain, Promus recast its 260-unit Hampton Inns chain from a budget hotel to a middle-market chain, competing directly with Holiday Inn and Courtyard by Marriott. Promus gained its own listing on the New York Stock Exchange in 1990. A year later, the company established a call center in Memphis to handle reservations for the three hotel chains. In addition, Promus acquired a 20-percent interest in KYZ International, a Hong Kong-based hotel management and development company.

Harrah’s headquarters were moved from Reno to Memphis in June 1991. At the time, several states legalized some forms of gambling in an effort to lure jobs and increase taxable income. Harrah’s, which contributed 85 percent of Promus’s total revenues, had an extremely good reputation for solid management. As a result, the company was awarded a franchise for a river-boat casino in Joliet, Illinois.

The legalization of gambling and entry of companies such as Harrah’s into conservative areas led to strong opposition from some community organizations. They complained that although gaming provided jobs, it merely redistributed income and did not result in the creation of a product with any economic value. In addition, there were few barriers of entry for those who could least afford to gamble. Others worried about the possible increase in crime in the neighborhoods surrounding the casinos.

To counteract these perceptions, Harrah’s insisted that it was a service enterprise, not a manufacturing business. Casinos provided hundreds of spin-off jobs that could revitalize the local economy. Many communities, like Joliet, simply could not afford to lose an employer to another city. The same logic led North Kansas City, Shreveport, and Tunica County, Mississippi, to invite Harrah’s to develop riverboat casinos in the early 1990s.

In November 1992, Promus acquired an interest in Sodak Gaming, Inc., a distributor of slot machines and other gambling equipment used on Native American reservations. A month later, the Ak-Chin community in Arizona selected Promus to develop an $18-million casino near Phoenix. Promus’s business with Native American interests took off in 1993, as the company negotiated development agreements with a Sioux community in Minnesota and the Poarch Creek community in Alabama. Harrah’s also developed plans for casino developments in St. Louis, New Orleans, Southern Indiana/Eastern Kentucky, Northern Kentucky/Southern Ohio, and Windsor, Ontario.

Ironically, Promus’s transformation from the parent company of a family hotel chain into a leading international casino operator probably would not have occurred if the company had not been targeted by Donald Trump. The failed raid forced Rose to develop a tight business strategy.

Promus ran into trouble with Bass over its Holiday Inn deal in 1992. Bass sued for a sum in excess of $50 million, charging that Promus withheld information on a Federal Trade Commission probe of Holiday Inns International, a defunct time-share unit that roped consumers into high-pressure sales meetings under the aegis of a contest prize. By late 1993 the suit was still unresolved.

Promus continued to experience stable growth from the three niche-market hotel chains it operates. Most of these were sold to franchisees before the 1990-92 recession, which in turn boosted Promus’s earnings. Typically, the company developed a hotel and sold it within three years, deriving investment-free fee income from management contracts.

Promus derives nearly seven-eights of its revenue from middle-market gambling operations. The Harrah’s business, still one of the most respected casino businesses in the world, maintains strict managerial discipline and wagering limits aimed not only at protecting customers’ losses, but also at maintaining stable earnings.

Principal Subsidiaries

Aster Insurance, Ltd. (Bermuda); Embassy Suites, Inc.; Embassy Suites de Mexico, S.A. (96%); Embassy Suites (Puerto Rico); EPAM Corp.; ESI-Air, Inc.; ESI Development, Inc.; ESI Mortgage Development Corp.; ESI Mortgage Development Corp. II; ESI Equity Development Corp.; GOL (Heathrow), Inc.; Hampton Inns, Inc.; Harrah’s (Nevada); Homewood Suites, Inc.; Pacific Hotels, Inc.; Tennessee Restaurant Company (33.2%).