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Rod Smith

Caesars Board Accepts Harrah's Offer

15 July 2004

LAS VEGAS -- An agreement in principle for Harrah's Entertainment to buy Caesars Entertainment for about $17 a share, or roughly $10 billion, was approved by each company's board of directors late Wednesday, sources close to the talks said.

Details about the agreement, which will create the world's largest gaming company, were not available late Wednesday although sources said the companies will make an announcement this morning despite a few issues remaining to be ironed out.

The sale will be a combined stock and cash deal, with the final price depending on the price of Harrah's shares at a date that will be set by the final contract.

Before the companies can complete the deal, they will need to win approval from federal antitrust officials and regulators in states where the two companies operate.

Sources close to the negotiations said that executives from the two companies, with Caesars co-chairman Stephen Bollenbach and Harrah's President Gary Loveman being the driving forces behind the merger talks, were "set on getting the deal done."

Some sources were saying throughout the day Wednesday that executives were engaged in intense but friendly talks with an announcement imminent after coming close to agreement on all major points including the proposed purchase price.

Joe Greff, gaming analyst at Fulcrum Global Partners, an independent Wall Street investment research firm, said earlier Wednesday that a fair market value for Caesars Entertainment would be "$18 a share, plus change."

A leverage buyout specialist said a sale price of $18.50 to $19 a share, at the outside, is likely and would be comparable to the $71 a share Las Vegas-based MGM Mirage is offering for Las Vegas-based Mandalay Resort Group.

That acquisition deal was touted as the largest gaming industry merger ever which would create a gaming giant with a total of 28 hotel-casinos with annual revenues of $6.9 billion and cash flow of $2.1 billion.

Analysts who asked not to be named said the proposed Harrah's-Caesars deal amounted to a case of trying to keep up with the Joneses, with neither Las Vegas-based company wanting to give up its claims to being the world's largest gaming company: Harrah's for having the most cash flow and Caesars for having the most revenue.

A combined Harrah's-Caesars would eclipse a MGM Mirage-Mandalay combination with a total of 53 properties, annual revenues of $9.4 billion and cash flow of $2.3 billion.

However, the buyout specialist added that, for investors, the Harrah's-Caesars deal would come without the same quality of properties and without a majority owner with the reputation of Kirk Kerkorian, the controlling shareholder in MGM Mirage.

He said Kerkorian's name "is like gold on Wall Street," and adds confidence for investors.

"We expect at a minimum the deal will come at some discount to Mandalay and with new stock being added to the mix to finance the takeout," the specialist added.

Leaks on Tuesday that the discussions were under way sent Caesars stock soaring to $16 a share Wednesday, up $2.08 or 15 percent on 33 million shares, 15 times normal trading volume.

Harrah's closed at $50.98, down $1 a share, or 2 percent, on 2.7 million shares, triple normal trading volume.

Wall Street analysts said Harrah's stock slipped during the day not because of concerns about the merger, but because there will be some dilution of the stock or because the company will issue more stock to finance the merger.

Some analysts doubted that Harrah's, the only gaming company with investment grade debt, would be willing to risk its credit ratings and the increased cost of capital that would entail.

They said an all-cash deal, like MGM Mirage's purchase of Mandalay, would increase the company's debt-to-cash flow ratio from 3.6 to six. A higher ratio makes it more expensive for a company to finance its debts, just as added debt makes it more difficult for individuals to pay off loans.

However, they also said it is likely Harrah's will use a stock offering already registered with the federal Securities and Exchange Commission to finance the deal, which would allow it to protect its credit ratings.

Greff said buying Caesars Entertainment will give Harrah's a significant presence on the Strip for the first time, which Loveman has called an important goal for this company. In addition to operating the upper-tier Caesars Palace, Caesars also owns the Flamingo, Bally's and Paris Las Vegas on the Strip.

However, because Harrah's owns and operates an extensive network of casino and riverboat operations in 13 states, it also opens up significant antitrust issues in certain jurisdictions, including Atlantic City, Mississippi, Indiana and, possibly, Las Vegas, he said.

"It's great for Caesars' shareholders. For Harrah's, there are more questions than answers," Greff said, noting the proposed merger will raise antitrust and market share concerns for federal and state regulators.

Deutsche Bank analyst Marc Falcone said regulators will almost certainly force divestitures in Atlantic City and Lake Tahoe, and that state laws limiting gaming licenses will require a divestiture in Indiana, to win regulators' approval.

"In order for a transaction to be consummated, it would require significant divestitures in my mind, which raises the questions of what Harrah's is going to buy," he said.

Analysts also said the Harrah's deal is likely to give Kerkorian heartburn because it will complicate his purchase of Mandalay.

Analysts have been speculating that the Mandalay acquisition could be done without state or federal regulators forcing the sale of any hotel-casinos except in Detroit, where both MGM Mirage and Mandalay Resort own or jointly own casinos.

However, with the two mergers happening at the same time, they said it is likely regulators will be tougher on MGM Mirage and there is a greater likelihood it will be forced to sell off individual properties it wished to retain after its merger.

Executives from Harrah's and Caesars Entertainment were unavailable for comment Wednesday, but MGM Mirage spokesman Alan Feldman said his company doubts there will be any fallout from the Harrah's deal.

"We do not have any objection to the deal discussed in media reports and we don't think this transaction, should it occur, would have any impact on the acquisition of Mandalay," he said.

Still, analysts said at a minimum the Harrah's-Caesars merger will slow down, and possibly stall, the MGM Mirage-Mandalay deal, even if no property sales are required.

Caesars Board Accepts Harrah's Offer is republished from