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Best of Liz Benston

Gaming Guru

Liz Benston

Looking in on: Gaming

12 February 2007

LAS VEGAS, Nevada -- Harrah's Entertainment was exploring a deal to reshape the company as early as January 2006 and began discussions in August with private equity firms interested in buying out the company, according to proxy materials sent to shareholders considering the firms' $90 per share offer to take Harrah's private.

The document is evidence that executives including Chief Executive Gary Loveman - who stands to cash out stock and options worth $94 million if the deal is consummated - discussed potential deals before the full board of directors had met to discuss any bids. The proxy also reveals that the company's board - it's independent of management - initiated a lengthy and thorough process to squeeze a higher bid from the private equity firms and invite other companies to participate in the bid process.

In late August Loveman told an independent, or nonmanagement, board member about initial discussions earlier that month with buyout firm Apollo Management Group. Executives met the following month with buyout firm Texas Pacific Group, documents show.

The day after that meeting, Loveman told the board member about the firms' interest.

The next day several board members requested a meeting to discuss the offers. At that Sept. 19 meeting the board created a special committee of independent board members to consider the buyout and initiated three months of high-stakes negotiations with the firms and, separately, with Penn National Gaming, which is identified as "Company B" in the proxy.

Shareholders of Harrah's and some other companies being taken private recently sued a group of buyout firms, claiming the firms colluded to fix prices. Some legal experts say shareholders should also be concerned with executives engineering buyouts to their benefit.

That might have seemed a concern for Harrah's shareholders, especially because the purchase price appears less than when other casino companies are trading as a multiple of profit. But those negotiations began before casino stocks - boosted by MGM Mirage shareholder Kirk Kerkorian's stock buyback and a flood of interest from private equity firms - began to rise in a big way.

• • •

Want to buy a casino in Las Vegas? With private equity firms looking to pay down the more than $20 billion in bonds, bank debt and mortgage loans they will use to buy out Harrah's, this might be just the time to approach the casino giant to bag, say, that Rio casino you've had your eye on.

But not so fast. Even as it becomes the most debt-laden of its casino peers, Harrah's doesn't want to part with its prized Las Vegas assets. The casinos are worth more as part of the company's Total Rewards gambler marketing program than they are as separate assets, executives say. And Wall Street analysts say it probably doesn't make sense to sell a casino unless the company gets a substantial premium over what the property would be worth on the open market.

That's because the private equity firms are paying close to 11 times the cash its casinos earn from operations each year. To make a profit on a sale and make a significant dent in its debt load, a property might have to sell for 13 or 14 times that profit, Wachovia Securities bond analyst Dennis Farrell Jr. said.

"We don't think they'll sell any assets" unless regulators require it, Farrell said.

And unless the price is right.

• • •

It's one thing for a casino to encourage gamblers' trigger fingers with ads showing "loose slots" or smiling winners. It's another for a casino to tout slot machines that are statistically more likely to pay back bets. Using regional data from the Gaming Control Board, El Cortez officials began an advertising campaign touting that their slot machines are 30 percent looser than the downtown average, 35 percent looser than the Strip and 16 percent looser than Boulder Highway casinos.

The figures were verified by Las Vegas firm Compton Dancer Consulting, which retains math experts and slot players to test machines' payback percentages. Nevada regulators don't require casinos to publish slot paybacks. But they have chastised casinos for bold claims such as "loosest slots in town" that are unsupported by surveys or other research.

El Cortez bosses needn't worry. The ads were vetted by a compliance committee made up of former Nevada regulators.

Looking in on: Gaming is republished from