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John G. Edwards

Let the Guessing Begin ...

3 October 2006

LAS VEGAS, Nevada AND NEW YORK -- The $15 billion that two equity firms offered to take Harrah's Entertainment private created a frenzy of buying for other casino operator stocks on Monday, as investors speculated on the potential for similar offers for other gaming companies.

"New York equity funds are starting to turn their attention to the gaming industry," said David Ehlers, chairman of Las Vegas Investment Advisors. "These funds have so much money that it's staggering," he said. "None of these big buyout funds wants to be left in the dust."

Greg Bangma, who manages investments for Maul Capital Management in Las Vegas, agreed with Ehlers, saying many private equity funds are "full of cash" and anxious to put that money to work for clients.

Bangma noted that the stocks of casino operators have fallen since hitting highs in May, with the exception of Wynn Resorts Ltd. and Las Vegas Sands Corp., both companies with casinos in Macau.

Before the buyout offer, "Harrah's was looking pretty cheap," Bangma said.

If two giant private equity funds, Apollo Management and Texas Pacific Group, see value in Harrah's, "that's telling you that maybe some of these other companies are underpriced, too," Bangma said.

"This sort of action is going to divert money into the whole sector," he said. "All the casino stocks are up today."

Bear Stearns gaming analyst Joe Greff said he expects to see more private-equity buyouts of gaming companies. He said Boyd Gaming Corp., Station Casinos and Pinnacle Entertainment, all based in Las Vegas, and Penn National Gaming of Pennsylvania, would prove attractive targets because they have "reasonable valuations" and significant stores of land that could be developed or sold.

Jeffrey Logsdon of BMO Capital Markets agreed future private take-downs of gaming companies are probable. He named Penn National and Boyd Gaming as two companies that would be likely to negotiate if an offer proved attractive to their owners.

"It's like a poker tournament," Logsdon said. "We have multiple hands that will go on until we get to the end. We thought we were at the end with MGM Mirage and Harrah's dividing up the kingdom, but the kingdom has become global instead of domestic, or Las Vegas-centric."

Michael Scerbo, a bond analyst with Standard & Poor's Rating Services, was more cautious, saying that he didn't necessarily anticipate more leveraged buyout offers for gaming companies

Jeremy Aguero, an analyst and part owner of Applied Analysis, a Las Vegas financial consulting firm, however, speculated that more leveraged buyout offers will be made for casino operators "if history has taught us anything." But he disagreed with the suggestion that the buyout offer for Harrah's was the major factor driving the shares of casino operators higher on Monday.

"I don't think it had a terribly large amount to do with Harrah's," Aguero said.

MGM Mirage probably was more affected than other casino operators by the offer for Harrah's, Aguero said.

"If Harrah's is that much undervalued, MGM is that much undervalued," Aguero said. "There's a long row to hoe (to determine) whether this is a viable transaction."

Private equity firms have been putting billions into mergers and acquisitions this year. Seven of the 10 biggest buyouts have been sponsored by private equity firms in 2006 and the deals range from semiconductors and energy to media and grocery stores.

Brian Ford, an analyst at Ernst & Young in Philadelphia, who tracks the gambling and retail industries, said private equity firms' pursuit of casino companies was unsurprising.

He cited two successful examples in the last 18 months: Colony Capital LLC of Los Angeles acquiring the Atlantic City Hilton casino from Caesars Entertainment early last year, and more recently, Columbia Sussex Corp.'s purchase of Aztar Corp., the owner of the Tropicana casinos in Atlantic City and Las Vegas, this spring.

"It's been a trend," he said. "The regulatory climate and the maturing of it has allowed major private equity investors some of the same benefits allowed public companies relative to licensing individual shareholders."

Harrah's on Monday announced a deal to exchange real estate for the land that Boyd's Barbary Coast casino occupies on the northeast corner of Flamingo Road and the Strip.

"A lot of people think the purchase would be a blow to what Harrah's wants to do (in expanding operations)," Ehlers said.

A private equity company probably would try to pay down the debt of Harrah's after the buyout, rather than expand operations, he said.

Also, Ehlers noted that Harrah's board has not announced an opinion on the offer but rather reported appointing a special committee of independent directors to review the offer.

With Harrah's shares closing 10 percent below the offer price, Wall Street apparently lacks conviction that the deal will be accomplished, Bangma said.

Shares in Boyd Gaming rose $2.11, or 5.49 percent, Monday to close at $40.55.

Pinnacle Entertainment gained $1.33, or 4.73 percent, closing at $29.45. Station Casinos jumped $2.23 or 3.86 percent to $60.06.

Ameristar Casinos added 54 cents, or 2.49 percent, to $22.25. Riviera Holdings Corp. picked up 7 cents, or 0.34 percent, to $20.50. Wynn Resorts added 74 cents, or 1.09 percent, to close at $68.75. Las Vegas Sands fell 58 cents, or fell 0.85 percent, to close at $67.77.

Review-Journal writer Jennifer Robison and McClatchey Newspapers contributed to this report.

Let the Guessing Begin ... is republished from
John G. Edwards
John G. Edwards