If you're a
multibillion-dollar private equity fund such as Texas
Pacific Group or Apollo Management, you could buy up an
entire company or just most of it, becoming a controlling
shareholder and electing handpicked members to a company's
board of directors.
You could buy
a floundering business as Texas Pacific Group, a buyout
and turnaround specialist, did with Continental Airlines,
which avoided yet another bankruptcy under private ownership,
and Burger King, which was improved and taken public by
Texas Pacific and other partners this year.
Along the way,
you could boost results by shaking up management and selling
off underperforming assets, as Texas Pacific and Apollo
have done.
You could also
expand or take a company in a new direction, as Apollo
did when it controlled Vail Resorts, a Colorado-based
resort hotel company.
Under Apollo's
majority ownership, Vail Resorts bought up resort hotels
and other real estate and has been expanding its vacation
empire ever since. Apollo took Vail public in 1997 and
sold most of its stake in the company in 2004.
What direction
the funds will take with Harrah's Entertainment isn't
clear, although it's important to note that there's more
to leveraged buyouts than a slash-and-burn approach to
management.
For now, it's
unclear how aggressively Harrah's will pursue dozens of
potential growth opportunities in Las Vegas and beyond.
In an interview
last week, Harrah's Chief Financial Officer Jonathan Halkyard
said the company still plans to redevelop its Las Vegas
casinos, work that has consumed the better part of nine
months in brainstorming.
"This
is an R&D exercise more than a construction drawing
exercise at this point," Halkyard said, adding that
the company has accumulated many conceptual drawings.
Plans will be announced in phases over the course of 2007
and 2008 and will be built in stages, he said.
The first of
those may take shape at the company's Caesars Palace flagship,
which is further along than other properties in the planning
process, Halkyard said.
The company
wants to add a hotel tower behind Caesars' new Augustus
Tower and replace its Strip-facing Roman Plaza with a
building containing casino space, retail, restaurants
and bars. The plans are expected to reach the Clark County
Commission for a vote in January after being held over
from a Dec . 20 meeting, although further delays are possible.
Top executives
say private ownership won't alter the company's growth
strategy, but they have acknowledged in employee meetings
that paying down debt - estimated to nearly double after
the deal consummates - will become their top priority.
In an attempt
to allay concerns, the company is making presentations
and distributing information to employees about Apollo
and Texas Pacific, which are unknown entities in Nevada
in spite of their recent rise to Wall Street fame as some
of the largest buyout firms to take American companies
private in recent years.
For instance,
from one presentation: "Both firms have proven track
records and strong reputations for partnering with companies
to nurture and grow some of America's most recognized
brands, including Continental Airlines, Neiman Marcus,
Vail Resorts, Linens 'n Things, J. Crew, GNC Corp. and
Bally Shoe. Of particular importance are their long-term
perspective and willingness to help us in any way they
can to deliver on our growth strategy and achieve our
full potential."
Analysts are
divided on whether Harrah's will choose to grow or scale
back on spending, with some experts saying the company
may choose a middle ground. Harrah's hasn't yet revealed
many details of its plans in Las Vegas and abroad and
therefore can reduce those plans somewhat without disappointing
the public, they say.
News of the
Harrah's buyout comes as many of the largest private equity
firms, including Apollo, have formed their first-ever
trade association to help legislators and regulators understand
how buyout companies work.
The association
would also help put a positive face on a business that
has historically been associated, sometimes unfairly,
with mass layoffs and asset sales to drive profits.
As the seventh-largest
leveraged buyout in U.S. history and the largest in the
gaming industry, the Harrah's deal is uncharted territory
for all involved.
For now, Harrah's
executives are bullish on growth.
The company
is continuing its expansion of Harrah's Atlantic City,
expected to be complete in 2008, and is acquiring London
Clubs International, a British casino chain that also
owns casinos in Egypt and South Africa, and is pursuing
plans to build at least five casinos across the United
Kingdom.
"Internationally
we don't expect (the purchase) to influence any plans,"
Halkyard said of the company's stated goal of building
Caesars casinos in the Bahamas, Spain and Slovenia.
Asia remains
a key part of the company's growth plan, he added.
