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Analysts' Views Differ On Prospects For Park Place Merger

26 October 2000

ATLANTIC CITY, New Jersey – Oct. 26, 2000 – Some analysts view Park Place Entertainment's third-quarter results as a mixed bag.

Park Place reported net income before pre-opening charges of $68 million or 22 cents for the third quarter ended Sept. 30 vs. $58 million or 19 cents in the year-ago quarter.

Banc of America Securities LCC analyst J. Cogan said the company's Atlantic City results were better than he expected and Las Vegas results were in line, excluding the Las Vegas Hilton, which is being sold; but Mississippi results weren't what he had hoped they'd be.

Some of the Atlantic City properties saw nice increases in cash flow, Cogan said. Operating cash flows were lighter than he expected at the company's Grand Tunica in Mississippi.

Park Place said in its earnings press release Wednesday that third-quarter earnings before interest, taxes, depreciation and amortization at Grand Tunica were $12 million, down from $18 million in the year-ago period. The company attributed the decrease to competitive market conditions and increased promotional spending.

"The Gulf Coast continues to be tough," Cogan said. "Overall, it was a mixed bag but the quarter came in as expected."

Park Place met the third-quarter expectation of McDonald Investments Inc. analyst Dennis Forst, but its operating cash flow was less than he had expected.

Cogan and Forst liked the fact that Park Place Entertainment's board chose Tom Gallagher as president and chief executive following last week's death of Chief Executive Arthur Goldberg.

His selection may have surprised some Wall Street observers because of the low profile he had at Hilton. But he was involved in Hilton's spinoff of its gambling business to Park Place, as well as other not-so-successful endeavors, including Hilton's unsuccessful attempt to take over the former ITT Corp.

"He knows the people and the business," Forst said. "He's got a very good background."

Cogan said he doesn't see Gallagher changing the course of Park Place's strategy, something Gallagher reiterated during Wednesday's conference call.

"He seems to have the focus on the shareholders and on creating value that Arthur had and was good at," Cogan said. "I think that was comforting to investors on the call."

Robin Farley, gaming analyst at PaineWebber, wrote in a Wednesday report that Gallagher could help shift the downward decline of Park Place's stock.

"Given the aggressive positioning of the new CEO, we believe some of the uncertainty discount in the stock may come out," Farley said.

Cogan and Forst differ as to whether the quick naming of Gallagher to head the company takes Park Place Entertainment out of the takeover target buzz. Forst said he finds the possibility of the company being taken over "ridiculous," and that he can't imagine who a possible buyer would be.

Cogan views the stock as being undervalued on a fundamental basis. There's always a chance that for the right price the company would consider being bought, he said. Cogan doubts Park Place would say no, for example, to an offer of $25 a share, which he noted was far from its current trading price.

"I think it's always a possibility," Cogan said. "But this is a company that isn't in dire straits. It has a very healthy balance sheet."

And its stock remains an attractive value, said Merrill Lynch gaming analyst David Anders.

"Park Place remains one of the most attractively valued large-cap gaming stocks in (the gaming industry)," Anders wrote, noting that Park Place traded at 6.4 times its expected 2001 cash flow. Other similar gaming companies trade at seven times 2001 cash flow. Anders repeated his buy rating.

Park Place Chief Financial Officer Scott LaPorta, in the meantime, said he's comfortable with analyst expectations that the company will earn 13 cents per share in the current quarter. The decline from the September quarter is due to an annual winter slowdown in business, particularly in Atlantic City and Mississippi, analysts said.

In a move that could help ease investor concerns that the Las Vegas market is softening, Executive Vice President Mark Dodson said he expects room rates to be "relatively flat to up" in the current quarter.

"Next year should be good on the (room) rate side," Dodson said. "We're very comfortable with the market conditions (in Las Vegas) for the fourth quarter and for next year."

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