Harrahs bid could spark other buyers

05.10.2006, Lesen Sie hier den Bericht über «Harrahs bid could spark other buyers»

The latest offering of us$ 81 a share sets a new precedent in the industry (US).- The proposed us$ 15 billion buyout of the world’s largest casino operator, Harrah’s Entertainment, by two private equity firms could spark a wave of bids in a sector that is rich in cash flows and real estate, analysts say - assuming the deal can be successfully sealed.

Private equity firms have mostly avoided the gambling industry to dodge the harsh eye of regulators, but they have gradually refined the target of their probity to chief decision makers as more and more complex organizations sought to carve out a piece of the gambling pie.

In gambling’s early days with single casino operators, regulators grilled every shareholder and director, according to Nevada Gaming Control Board member Mark Clayton. In the late 1970s, as publicly traded Wall Street companies got interested, they focused on chairmen, top executives and holders of more than 10 percent in stock.

In the late 1990s, when private equity funds got involved, a new structure took form - a dual share-owning scheme in which only a few executives with voting shares had to be probed, leaving passive investors with nonvoting shares free to avoid scrutiny and reap the benefits."We’ve started to slowly evolve to understand the private equity structure," Clayton said.

If Texas Pacific Group and Apollo Management overcome the regulatory obstacles facing the fifth biggest leveraged buyout in history, it could pave the way for others, said Wachovia Securities fixed income analyst Dennis Farrell.

"With a large transaction of this size, it will prove to everyone that this is the way we set up the ownership structure and we’re able to get licensing in these jurisdictions this way, and it really kind of creates a blueprint for others," he said. David Katz, an analyst at CIBC World Markets, agreed. "Should they succeed, there is a valid argument for a new perspective on the valuation of gaming stocks," he said. "It could take us 12 to 18 months to find that answer out. However, I think that’s what’s at stake here."

The latest offering of us$ 81 a share sets a new precedent in the industry - it would be the largest ever buyout in gambling history and the first takeover bid by private funds of one of the major players among publicly traded casino companies.

Analysts, lawyers and industry players are watching with interest. "It’s the normalization of our industry in the economy of the United States," said American Gaming Association president Frank Fahrenkopf. "This kind of thing happens all the time in other industries. It’s new to ours."

The probe of the top executives who come forward to control the new entity could take as long as two years, some analysts speculated, given that Harrah’s owns some 40 properties in Nevada, New Jersey, Missouri and Mississippi, each with their own regulatory bodies and standards.

In August, the failure of Columbia Sussex to get licensed in Missouri forced its takeover target, Aztar, to divest itself of a casino in Caruthersville. The large time lag before a deal would be sealed has helped keep a lid on Harrah’s stock price, which closed at us$ 74.71 on Tuesday, far below the us$ 81 bid.

Analyst Steven Kent of Goldman Sachs said the closing price of us$ 75.68 on Monday, the day the bid was announced, implied the market believed the deal would be consummated at us$ 83 - acknowledging the possibility of another bidder or Harrah’s board squeezing out a higher offer to win shareholder approval.

Credit ratings agencies, however, have frowned on the deal, noting Harrah’s approximately us$ 10.8 billion in debt could balloon, increasing the risk to lenders. Standard & Poor’s and Fitch cut Harrah’s to junk status on Monday, while Moody’s changed the outlook on Harrah’s to negative.

Even if the deal did not go through, Harrah’s board of directors would be pressured to come up with an alternative plan to boost shareholder value, like a share buyback or dividends, which would drain cash or require new bonds, both of which would hurt its credit rating, said Fitch analyst Michael Paladino.

"Shareholders were looking at potentially an us$ 81 stock price," he said. "If the deal doesn’t go through and it goes back down to the us$ 60s, they could expect some kind of compensation." Yahoo Finance

Über Harrah's Operating Company, Inc.:

Founded in 1937, Harrah´s Entertainment, Inc. is the world´s largest casino operator.

We operate 28 casinos in 12 states under the Harrah´s, Harveys, Horseshoe, Rio, and Showboat brand names. Our goal is to provide great customer service in exciting and entertaining environments, and become your overwhelming first choice for casino entertainment.

We concentrate on building loyalty and value for our customers, shareholders, employees, business partners, and communities by being the most service- oriented, technology-driven, geographically-diversified company in gaming. Enjoy your visit to our site. We look forward to your comments about us.

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