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Harrah's Plans to Pursue Growth, But Analysts Have Doubts

Harrah's Entertainmentchief executive Gary Loveman said a $17.1
billion deal to take the world's largest casino company private was "a change in ownership, not a change in direction," but analysts predicted project development could be slowed.

The leveraged buyout, in which private equity funds Apollo Management Group and Texas Pacific Group will pay $90 a share, will add debt to the $10.7 billion already on Harrah's books, Loveman told The Associated Press, without giving specifics. Harrah's board agreed to the deal Tuesday, the largest public-to-private transaction for a casino company in history.

"These privatizations always do add to the debt load of the company and that'll be true here," Loveman said, but added "we're confident that we will be able to pursue our master plan objectives."

The objectives included a massive redevelopment plan that was to be announced early next year linking properties on the Las Vegas Strip and another for Atlantic City, N.J. Going private may change how those plans are announcd, Loveman said.

Susquehanna Financial Group analyst Robert Lafleur said plans might be shrunk or slowed because of the squeeze that debt payments put on cash flow.

"Less Capital Available"

"There's just less capital available to them," he said. "The plans may be on track, but then again we never really knew what the plans were. We never knew whether that involved knocking everything down and starting from scratch or putting a new coat of paint on the place."

Slowed plans could benefit competitors MGM Mirage, which is set to open a $7 billion mixed-use megaresort called CityCenter on the Las Vegas Strip in late 2009, and Boyd Gaming, which plans to open its $4 billion Echelon Place nearby in mid-2010.

"If Harrah's projects are scaled back in any way or even pushed out a little bit, it gives them some breathing room to get their projects up and running," Lafleur said.

Harrah's also pulled out of plans to bid for a casino in Singapore after the original $81-per-share takeover bid by Apollo Management and Texas Pacific was announced Oct. 2. Two weeks ago, the bid was awarded to Malaysia's Genting International.

Loveman said no property sales, management changes or layoffs were planned, and he said Harrah's had not given up on seeking a foothold in Asia.

"We will continue to pursue an opportunity in Macau and, as they emerge, opportunities in other Asian countries," he said.

Pursuing Overseas Projects

Before the deal, Harrah's also was pursuing projects in the Bahamas, Spain and Slovenia.

Texas Pacific founding partner David Bonderman said the private equity pairing would be able to "help Harrah's deliver on its growth strategy" with a long-term perspective.

The $90-a-share deal offered a 36 percent premium above Harrah's closing price on Sept. 29, the last trading day before the initial bid for Harrah's was announced.

A special committee of Harrah's board had considered the offer for two months while official silence ensued. Apollo and Texas Pacific raised their bid to $83.50 a share later in October, according to a person close to the negotiations who spoke on condition of anonymity because of the sensitivity of the talks.

The committee then set a deadline for Tuesday for any final offers, and met last week in New York for a final negotiating session, the person said. Penn National Gaming, a Wyomissing, Pa.-based race track and casino operator, reportedly submitted a losing, mostly cash bid of $87 per share. A Penn spokesman declined to comment.

Harrah's said the deal was expected to be completed in about a year, but that its special committee would continue to solicit third parties for a possible higher bid for the next 25 days.

Harrah's already has likely extracted the highest offer, analysts said.

No Other Bids Expected

"We believe Harrah's board did everything it could to maximize the price," Morgan Stanley analyst Celeste Brown said in a research note. "Given the extensive process that led to this agreement, we wouldn't expect any more offers to be announced."

Apollo and Texas Pacific agreed to pay shareholders an extra $0.01973 per share every day starting March 1, 2008, if the deal had not closed by then, minus any part of a quarterly dividend of 40 cents a share paid on or after that date.

The transaction for Harrah's, excluding debt, ranks as the seventh-largest leveraged buyout ever, according to Thomson Financial. The largest was RJR Nabisco's $25 billion acquisition by Kohlberg Kravis Roberts in 1998.

Harrah's is the world's largest casino company by revenue, operating 39 casinos nationwide, including Caesars Palace, Bally's and Paris on the Las Vegas Strip, and Caesars and Harrah's in Atlantic City, N.J. It also has interests in Casino Windsor in Canada, to be renamed Caesars Windsor in early 2008, and Conrad Punta del Este in Uruguay.

By year's end, Harrah's is to acquire all the shares in U.K.-based London Clubs International PLC, which operates seven casinos in the U.K., two in Egypt, one in South Africa and is a consultant for a casino in Lebanon.