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Jennifer Robison

Harrah's Buyout Price Could Go Up

3 October 2006

The price tag on a massive buyout offer to take Harrah's Entertainment private could go higher in coming weeks, analysts said Monday.

Private-equity firms Texas Pacific Group and Apollo Management on Monday offered $81 a share, or more than $15 billion, to buy Harrah's.

But Joe Greff, a gaming analyst with Bear Stearns, set a "fair value range" for Harrah's of as much as $85 a share. He said he believes officials at Harrah's will point to the company's development pipeline and land holdings to "indirectly solicit a higher offer" in the low to mid-80s.

He said officials at Harrah's should respond to the offer publicly within one to two weeks.

The $81-a-share offer of Texas Pacific Group and Apollo Management is well above the $66.43 the company's stock commanded at the close of last week.

After the news came out, Harrah's shares surged $9.25, or 13.9 percent, to close at $75.68 on Monday. The price was off a 52-week high of $83.33 set in May.

If the deal is consummated, it would be the fifth-largest leveraged buyout ever, excluding assumed debt of $10.7 billion, according to data from Thomson Financial. The largest ever was RJR Nabisco Inc.'s $25 billion acquisition by Kohlberg Kravis Roberts & Co. in 1998.

Just a year and a half ago, Las Vegas-based Harrah's completed its own $9 billion buyout of Caesars Entertainment.

Today, Harrah's operates about 40 casinos throughout the country, including Caesars Palace, and other casinos under the names Bally's, Horseshoe and Showboat.

Harrah's released a statement Monday saying that its board of directors would assemble a committee to study the offer, and that company executives had not determined if the buyout is in the best interests of shareholders. The company has retained UBS Securities as an adviser.

If Harrah's approves the deal, Texas Pacific and Apollo would land a company with prized assets including nearly 350 acres of property in Las Vegas, the venerable Caesars Palace trademark and the white-hot World Series of Poker brand.

Executives from neither Texas Pacific nor Apollo returned phone calls Monday.

But Frank Schreck, a Las Vegas gaming attorney who is representing both firms in regulatory matters, said private-equity companies are eyeing casino operators as acquisition targets for a variety of reasons.

"Gaming companies generate tremendous cash flow, and they have been good investments," Shreck said. "Gaming is one of the few industries that's growing and prospering."

Experts said Harrah's in particular appealed to Apollo and Texas Pacific because the company's stock is undervalued when compared with its competitors' shares.

Jeffrey Logsdon, managing director of BMO Capital Markets in Los Angeles, said Harrah's is trading at the lowest multiples of any of the Big Six operators, which also include Station Casinos, Boyd Gaming Corp., Las Vegas Sands Corp., Wynn Resorts Ltd. and MGM Mirage.

"Harrah's probably has one of the higher misunderstanding quotients attached to its stock," Logsdon said. "There's uncertainty about how they'll structure their Las Vegas opportunities and uncertainty over whether they'll be able to break into the Asian marketplace. That depresses the equity value. It doesn't change the value of the company. It's only investor perception."

Harrah's might lack a toehold in Asia, where Wynn Resorts, MGM Mirage and Las Vegas Sands are building properties in markets including Macau and Singapore. But the company is pursuing projects in Slovenia, Spain, the United Kingdom and the Bahamas. Those development deals, plus the myriad possibilities for the company's Las Vegas holdings, would be attractive to a buyout firm, said Brian Gordon, a gaming analyst with the Las Vegas research firm Applied Analysis.

"Those opportunities will allow Harrah's to grow and continue its expansion," Gordon said.

Private-equity firms have ventured into gaming in the past, beginning with Colony Capital's $420 million acquisition of Lake Tahoe-based Harveys Casino Resorts in 1998. In 2004, Colony Capital bought the Las Vegas Hilton for $280 million. Other private-equity companies with gaming holdings include Oaktree Capital Management, which has a one-third interest in Cannery Casino Resorts, and Bay Harbour Management, which owns half of the Aladdin and is involved in the property's ongoing transformation into the Planet Hollywood Resort and Casino.

However, the Harrah's offer is significant for both its size and the players involved.

Greff said he was surprised that two private-equity firms with no gaming holdings would enter the sector on such a large scale.

Reports from market-research company Hoover's show that Fort Worth, Texas-based Texas Pacific Group's holdings have included interests in Seagate Technology, ON Semiconductor, Burger King, Petco, Continental Airlines, America West Airlines and Metro-Goldwyn-Mayer. Earlier this year, Texas Pacific raised $14 billion for its newest buyout fund, Hoover's said.

New York-based Apollo Management's recent deals include a 2005 purchase of Borden Chemical, which it combined with other holdings to form Hexion Specialty Chemicals, Hoover's said. Earlier this year, Apollo bought for $975 million Tyco's plastics, adhesives and coated-products units, and renamed the operation Covalence Specialty Materials. Other Apollo holdings include AMC Entertainment and GNC. The company has managed more than $13 billion in equity investments since it opened in 1990.

The firms' lack of experience in gaming means management rosters at Harrah's aren't likely to change significantly if the deal closes. Neither will customers notice many differences in their experiences with Harrah's properties, experts said.

"(Texas Pacific and Apollo) just want to buy the company," Shreck said. "They think it's a very good company, and a well-managed company. They have ideas to maintain management and operations. (Only) the faceless owners would change."

Because those owners don't have existing casino holdings in the state, they'd need to obtain gaming licenses from the Nevada Gaming Commission.

Dennis Neilander, chairman of the Nevada Gaming Control Board, said he didn't know much about Texas Pacific or Apollo, and he couldn't speculate on the firms' prospects for license approval.

However, he said, regulatory hurdles could take nine months to a year.

Experts disagreed on whether the new owners of Harrah's would pursue all of the company's pre-existing expansion plans.

Greff said he expects "minimal investments" in redevelopment of the company's Strip holdings if the deal goes through.

"Harrah's has taken a long time coming up with a proposal that would generate a good return," he said. "Given where construction costs are now, it's hard to get acceptable returns on investments."

Greff said the buyers could create additional value by separating the operating, development and management of Harrah's properties, or perhaps by establishing a gaming real estate investment trust. Such potential moves could be a long time coming: Because Harrah's would be private, its new owners could take their time in considering value-boosting ideas independent of investor pressure to perform solidly on a quarterly basis, he said.

But Gordon said Texas Pacific and Apollo would likely consider at least some of the gaming company's development strategies.

"I think those expansion opportunities have increased interest in (Harrah's)," he said. "I think everything is on the table in terms of how the (buyers) would move forward with the plans that are in place today, but the overall business plan for Harrah's is strong. The fact that (the private-equity firms) are willing to pay a significant premium compared to the company's current stock valuation suggests they believe long-term in how the company could perform."

Schreck didn't disclose details about the venture, except to note that it's called "Project Hamlet."

Analysts said they expect Harrah's and its pursuers to eventually reach a final agreement.

Logsdon placed the probability of a buyout deal at more than 70 percent, and Greff said a deal was "more likely than not."

Added Calyon Securities gaming analyst Smedes Rose: "If Harrah's were to say, 'No,' I think they'd have to come up with a compelling reason for their shareholders as to why they shouldn't take a significant premium compared to where the stock has been trading lately."

The Associated Press contributed to this report.

Harrah's Buyout Price Could Go Up is republished from