firms buy Harrah's in deal worth $27.8 billion
Howard Stutz, Las Vegas Gaming Wire
VEGAS, Nev. -- Casino giant Harrah's Entertainment
will be owned by two private equity firms in an all-cash deal
worth $27.8 billion, the largest-ever transaction for a gaming
company and one of the largest-ever leveraged buyouts of an
deal, which had been brewing since Oct. 2, was announced Tuesday
afternoon after the close of trading on the New York Stock
Exchange and will take Las Vegas-based Harrah's, the world's
largest casino operator, private and out of the traditional
said financial terms of the buyout were agreed upon in principal
last week. New York-based Apollo Management and Texas Pacific
Group of Fort Worth, Texas, committed to pay $90 a share to
buy approximately 190 million outstanding shares of Harrah's
Entertainment, or $17.1 billion. In addition, the firms will
assume the company's $10.7 billion debt.
deal would be the fifth largest leveraged buyout this year
and the sixth largest of all time, according to Thomson Financial.
private equity groups will be paying a premium of approximately
36 percent over the closing price of Harrah's shares on Sept.
29, the last trading day before the private equity group's
original offer of $81 a share was disclosed. Shares of Harrah's
closed Tuesday at $82.32, up 14 cents or 0.17 percent.
analyst Matthew Jacob of Majestic Research in New York summed
up the deal as an industry-altering event. Investors are already
speculating on the next private equity funded takeover of
a casino operator.
think gaming industry investors are viewing this deal as (historic),"
Jacob said. "Investors are looking at anything that makes
a company's stock more attractive to private equity."
Farrell of Wachovia High Yield Research in Charlotte, N.C.,
said the transaction raises the gaming industry's valuation
bar in the minds of investors. Smaller casino operators wanting
to stay publicly traded, however, may be taking actions to
ward off suitors.
don't know if this is an industry changing deal, but the valuations
are rising and will continue to rise," Farrell said.
"Some companies are going to get defensive, maybe even
acquire smaller operators. What's clear is that if a leveraged
buyout can be completed for Harrah's, then any gaming company
is a target."
Mirage President and Chief Financial Officer Jim Murren said
the deal was the most significant transaction ever for a casino
operator, topping his company's $6.7 billion buyout of Mirage
Resorts in 2000 and the $7.9 billion buyout of Mandalay Resort
Group last year.
gaming industry is so small, something this large by any industry
scale is historic," Murren said. "The valuations
for casino companies are going through a sea change. We paid
eight times cash flow for Mirage and nine times cash flow
for Mandalay. Now, gaming companies are getting 13 to 14 times
terms of the transaction, the private equity groups have more
than a year to finalize the deal, which needs approval from
Harrah's stockholders and the endorsements of regulators in
the 13 states where Harrah's operates almost 40 casinos, including
Control Board Chairman Dennis Neilander said Tuesday it was
hard to predict how long the investigative process would take,
since it involves two large private equity firms that are
new to Nevada.
unclear the makeup of their corporate structure or how many
individuals will need to be licensed," Neilander said.
"We'll do what we can to accommodate any deadlines they
said other recent gaming industry private equity licensing
transactions took more than a year to finalize. A deal for
Los Angeles-based Oaktree Capital Management to purchase one-third
of Cannery Casino Resorts took more than a year to complete
and involved licensing eight individuals and the company,
expects other casino company private equity deals to come
about, but for now, regulators need to explore each transaction
on a case by case basis.
a statement, Harrah's Chairman and Chief Executive Officer
Gary Loveman said Apollo and Texas Pacific support the company's
will have owners who share our vision for Harrah's, are fully
supportive of our current strategy and are committed to helping
us execute on it," Loveman said. "This will be a
change in ownership, not a change in direction."
Weinert, a spokesman for industry consultant Spectrum Gaming,
told CBS MarketWatch the private equity firm's backing of
Harrah's initiatives were important aspects to the deal making
key statement is Gary Loveman saying that the new owners want
to continue down the path previously laid out by management,"
Weinert said. "This indicates that Harrah's will proceed
with its major expansions planned for Las Vegas and Atlantic
City. I also detect a bit of relief in that Harrah's can pursue
its vision without having to worry about the quarter-to-quarter
mind set of Wall Street."
transaction was the subject of multiple lengthy meetings in
New York between the Harrah's board of directors and representatives
of the private equity groups both last week and Sunday. The
Harrah's board voted Tuesday morning to approve the final
the terms of the merger agreement:
and Harrah's management team will be retained by the equity
groups and operate the company.
has 25 days to try and solicit superior proposals from interested
third parties. The company does not intend to disclose developments
on the solicitation process, however, unless and until its
board of directors has made a decision.
will pay shareholders its regular quarterly dividend of 40
cents a share until the transaction closes.
the deal doesn't close by March 1, 2008, Apollo and Texas
Pacific have agreed to increase the purchase price by just
under 2 cents per share per day.
executives said the company will continue to operate as usual
while the private equity groups seek regulatory approval.
The company operates such brands as Harrah's, Caesars and
Horseshoe. In addition, Harrah's owns the lucrative World
Series of Poker and also operates casinos in Canada and Uruguay.
has development deals in such countries as Spain and Slovenia
and has a deal in place to buy United Kingdom casino operator
London Clubs International.
2005, Harrah's reported earnings of $236.4 million on revenue
of $7.1 billion. The company has a current market capitalization
of almost $15 billion.
purchase of Harrah's comes 18 months after the company became
the gaming industry's largest casino operator after buying
rival Caesars Entertainment for a then-record $9 billion.
the next year, while the sponsors will be getting regulatory
approvals, our plan is just to put our heads down and continue
to run our business," said Harrah's CFO Jonathan Halkyard.
"We have several growth initiatives in the works, and
our plans are to continue those efforts."
selling to private-equity firms, gaming analysts believe Harrah's
will have more freedom to continue its expansion initiatives
without the scrutiny of shareholders seeking a quick return
Las Vegas, Harrah's operates seven casinos -- Harrah's Las
Vegas, Flamingo, Caesars Palace, Bally's, Paris Las Vegas,
Rio and Imperial Palace -- and is in the process of purchasing
the Barbary Coast. That deal is the result of a land swap
with Boyd Gaming Corp.
Barbary Coast and its 4.4 acres would give Harrah's some 350
acres contiguous with the Strip for development purposes.
Harrah's said the land, in total, cost approximately $13 million
an acre. The company is exploring options for the 350 acres,
including redeveloping some casino properties.
Stearns gaming analyst Joe Greff said how Harrah's operates
its business while the deal moves through the approval process
could have implications for other casino companies.
Harrah's were to pursue an aggressive (capital expenditure)
program in Las Vegas, with meaningful displacement and disruption,
this would likely benefit existing Strip operators, namely
MGM Mirage and Wynn Resorts," Greff said.
Mirage's Murren said he was glad Loveman and his team were
remaining on board. He expects the company to continue its
plans, especially with the land it controls on the Strip.
I believe, is not doing this deal to slow down growth,"
Murren said. "I think the new owners clearly believe
in Harrah's management. The public markets aren't rewarding
to a company during the development cycle, and I think it
will be easier for Harrah's to move forward with its initiatives."
potential new owners of Harrah's include Apollo Management
founding partner Leon Black, who was the former co-head of
corporate finance at now-defunct Drexel Lambert Inc., the
top underwriter of high-yield corporate debt before collapsing
in 1990. Black, 55, founded Apollo Management that year and
has made equity investments of more than $16 billion.
agreement eliminated Penn National Gaming Inc., a Wyomissing,
Pa.-based race track and casino operator, which reportedly
offered $88.50 per share.