Four years ago, the private equity firms TPG and Apollo bought the nation's largest gaming company for $90 a share in a $28 billion LBO (leveraged buyout).
And through the worst downturn the gaming industry has seen in a very long time, those firms along with management somehow kept Harrah’s Entertainment from filing bankruptcy.
This week, TPG and Apollo are hoping to take Harrah’s public again in a $500 million IPO (initial public offering) that if priced at the midpoint of the range will value the company at about 15 years worth of this year’s EBITDA.
Harrah’s will have a total enterprise value of about $26 billion with a successful IPO, but the firms that took it private have managed to avoid losing money on their investment through the timely purchase of the very bonds that were used to fund their buyout.
The sponsors, along with the hedge fund Paulson and Co., were buyers of $303.0 million and $532.4 million, respectively, of 5.625 percent senior notes due 2015, 6.5 percent senior notes due 2016 and 5.75 percent senior notes due 2017 of CEOC (collectively, the “Notes”), for an aggregate purchase price of $200.0 million and $351.3 million, respectively.
Now, Paulson and the sponsors will swap that debt for equity, giving Paulson 9 percent ownership in Harrah’s, while the sponsors control 81 percent and the public 9.3 percent.
What’s amazing about the entire transaction is private equity’s ability to create an exit for a terrible deal that never should have been done (though Harrah’s shareholders who sold at $90 are happy it was.)
Time will tell whether Harrah’s can generate a sizeable return for the sponsors and for the public, but the fact that it’s even around to go public speaks to the powers of private equity to keep even the worst of deals alive.
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