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Rod Smith

Report: Horseshoe Gaming Buyout Risky

3 December 2003

Harrah's Entertainment's planned $1.45 billion buyout of Horseshoe Gaming Holding Corp. creates substantial investor risks even though it may make strategic sense, a Merrill Lynch investor advisory warned Tuesday.

The biggest problem cited is incompatible corporate cultures. Other hurdles include taxes, new competition and player defection, each of which has scuttled past mergers.

In addition, cash flow at all three Horseshoe Gaming riverboats has been flagging, posing yet another hazard for Harrah's management and risk for the company's investors. Cash flow is generally defined as earnings before interest taxes, depreciation and amortization.

Harrah's Entertainment spokesman David Strow conceded that any major acquisition such as the Horseshoe Gaming buyout involves elements of risk.

"However, we believe this transaction makes strategic sense for our company and will be immediately accretive to earnings," he said.

Deutsche Bank analyst Marc Falcone said the buyout agreement "is not an absolute home run for Harrah's (because) they're buying assets at peak cash flow."

In its advisory to investors, Merrill Lynch said Harrah's ability to successfully make value-added acquisitions in recent years has been a key to the company's success.

Harrah's also acquired Louisiana Downs in 2002, Harvey's Casino Resorts in 2001, Players International in 1999 and Showboat in 1998.

Because of its vast national network of casinos and marketing programs, Harrah's is one of the few casino companies that can boost revenues and cash flow as well as cut costs with acquisitions.

However, in this case it will be difficult because all three Horseshoe riverboats reported declining cash flows in the first nine months of 2003.

Increasing competition could also be a challenge, especially as a tribal casino near Dallas competes for customers and Jack Binion, former Horseshoe Gaming owner with special ties to Texas, leaves the operation.

Possible tax increases are also a problem, which explains why riverboats have traded at a discount to Las Vegas properties.

Finally, the Merrill Lynch advisory cited key differences in corporate culture between Harrah's and Horseshoe Gaming.

From the beginning, the merger had some analysts on Wall Street puzzled because Harrah's was seen as paying top dollar for a largely defensive acquisition, specifically to keep competitors out of the markets involved.

Harrah's acquisition keeps Ameristar Casinos, which offered $1.39 billion for Horseshoe, out of three key riverboat markets.

Harrah's President Gary Loveman admitted in September the acquisition is partly defensive, but he also said the move will add "high-performing assets" that will improve his company's "growth profile."

Deutsche Bank analyst Andrew Zarnett said the transaction should prove a plus for Harrah's if the merger of operations is managed properly.

"At the end of the day, Harrah's is effectively acquiring a greater supply in a limited license business. More supply allows you to grow," he said.

University of Nevada, Las Vegas professor and casino industry expert Bill Thompson said the acquisition will continue Harrah's philosophy of maximizing the number of markets in which it operates.

And he said Harrah's has learned from mistakes such as those that dragged earnings downward after it acquired the Rio in January 1999.

The Harrah's Entertainment and Horseshoe Gaming merger is subject to approval by state regulators in Indiana, Louisiana and Indiana and has already been put on hold indefinitely because of federal concerns about anti-competitive effects of the buyout.

The Federal Trade Commission in November demanded added information from both companies to assure compliance with the Hart-Scott-Rodino Antitrust Improvement Act of 1976.

Report: Horseshoe Gaming Buyout Risky is republished from