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Rod Smith

Gaming Deal: Colony Gets Casinos for $1.2 Billion

28 September 2004

Colony Capital is poised to become a major competitor in the gaming industry nationwide after reaching a final agreement to buy four casinos from Harrah's Entertainment and Caesars Entertainment, analysts said Monday.

The agreement calls for Colony to pay $1.2 billion for Harrah's East Chicago, Harrah's Tunica (Miss.), Atlantic City Hilton and Bally's Tunica (Miss.), subject to regulatory approvals.

The new acquisitions come on top of its recent $280 million buyout of the Las Vegas Hilton from Caesars Entertainment in mid-June.

"Colony's en route to becoming a bigger player (in the gaming industry) than it has been. And I don't think this is their last acquisition," Joe Greff, gaming analyst at Fulcrum Global Partners, an independent Wall Street investment research firm, said. "I think what they probably have in mind is a diversified gaming operation along the lines of Harrah's. We expect Colony Capital to be a participant in the (continuing) consolidation in the gaming industry."

Colony officials declined to comment on their plans for the individual properties or building a casino company.

Los Angeles-based Colony Capital, a private, international investment firm focusing mainly on real estate-related assets and operating companies, has invested more than $10.5 billion in more than 7,500 assets since 1991.

However, Susquehanna Financial Group gaming analyst Eric Hausler said for now the company is rapidly becoming a serious competitor in the gaming industry, despite the possibility it could have a short-term exit strategy.

He warned it is unclear how long Colony will want to operate hotel-casinos. He cited Colony's brief foray into the gaming industry in Northern Nevada when it bought Harvey's Resorts in February 1999. Colony sold the company to Harrah's in July 2001.

Hausler also said Wall Street thinks the company's recent purchase of the Las Vegas Hilton was mainly for the real estate rather than the hotel-casino.

However, Thomas Barrack, founder and chairman of Colony, told Nevada gaming regulators in June during the company's licensing hearings for the Las Vegas Hilton, that the gaming industry has evolved to the point that Colony Capital and other private capital companies are more interested in long-term commitments than they have been in the past.

One of the few private investment firms licensed in gaming, Colony has owned Resorts International in Atlantic City since April 2001. Colony also is a partner in Accor Casinos in Europe.

Hausler conceded that Colony has made major investments in improving Resorts International in Atlantic City and has turned the hotel-casino into a must-see attraction.

Colony will pay $627 million for the two Harrah's properties and $612 million for the two Caesars properties, or about 8.5 time cash flow, a key measure of profitability, the companies said in filings with the Securities and Exchange Commission Monday. Cash flow generally is defined as earnings before interest, taxes, depreciation and amortization.

Antitrust experts had expected Harrah's to sell casinos in Atlantic City and the Gulf region to head off regulatory concerns about the pending sale of Caesars Entertainment to Harrah's for $9.4 billion. The sale of the four properties is not contingent on closing the larger merger.

Analysts had said Harrah's may be forced to sell some assets to ease antitrust concerns arising from the merger, and had suggested the divestitures could be at fire-sale prices.

Greff said for Caesars and Harrah's, the sale is at a much higher multiple to cash flow than Wall Street expected a month ago.

"So our hats are off to them. They're going to reduce the debt of Harrah's and Caesars, even before the merger goes down, and leave them with the best balance sheet of the big-cap gaming operators," Greff said.

Harrah's said it would use $476 million in after-tax proceeds to pay down debt and Caesars said it would also use $480 million in after-tax proceeds to reduce its debt.

Hausler said being able to complete the merger at a price equal to 7.5 times cash flow while selling the four properties at a price equal to 8.5 times cash flow means an instant profit for the companies.

"At prices like these, they should by all means sell as many (assets) as they can," he said.

However, Keith Schwer, director of the Center for Business and Economic Research at the University of Nevada, Las Vegas, questioned whether the sales will affect the industry much.

"It seems like they're just dividing the pie up in a different way," he said. "It'll still be the same number of players. The real question is whether the new mix will do better (financially) and be more creative, which only time will tell."

Still, University of Nevada, Las Vegas professor Bill Thompson, who specializes in gaming studies, said Colony Capital has deep pockets and the money to improve the quality of the operations it buys.

"They're not going to do anything foolish," he said. "They've been around the block and they ought to know what they are doing. This should be very good for the industry."

In addition to the financial benefits, Schwer said the sale will leave the combined Harrah's and Caesars Entertainment much more focused in Las Vegas and Atlantic City, where the company has said its strategic future lies.

State regulatory agencies and the Federal Trade Commission are reviewing the Harrah's-Caesars Entertainment merger, which the companies expect will close by mid-2005.

Harrah's spokesman Gary Thompson declined to comment on the sales agreement beyond the information contained in the company's statement. Caesars Entertainment could not be reached for comment.