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Rod Smith

THE STRIP: Harrah's has an Out in Merger

20 July 2004

Harrah's Entertainment included an escape clause in its final merger agreement to buy Caesars Entertainment for about $9.4 billion, documents filed with the Securities and Exchange Commission showed.

Specifically, if Harrah's believes any property sales ordered by federal or state regulators would hurt the company "materially," it can drop out of the proposed merger, the final agreement said. Regulators may order divestitures if a proposed merger would make certain marketplaces uncompetitive.

Steven Newborn, a partner in New York-based Weil Gotshal & Manges who was the former director of litigation at the Federal Trade Commission's Bureau of Competition, said such contract provisions are not unusual and have been used in the past to cancel corporate marriages like the Caesars buyout.

Eric Hausler, gaming analyst for Susquehanna Financial Group, said it was predictable Harrah's would have insisted on the provision because of the importance it attaches to picking up Strip properties.

Harrah's would gain control of four Strip resorts -- Caesars Palace, Paris Las Vegas, the Flamingo and Bally's -- in the merger, which would create the world's largest gaming company.

"If regulators said the company had to sell the assets it wants most, they certainly would want the option to kill the deal to protect themselves," Hausler said.

Mike Cowie, a partner in the Washington, D.C.-based Howrey Simon Arnold & White law firm, which specializes in antitrust and international law, said the Harrah's deal is likely to bring close scrutiny from regulators especially with the MGM Mirage-Mandalay Resort Group deal already in the works.

Nevada, where Caesars and Harrah's operate a total of 15 casinos, is the real wild card for closing the deal.

Analysts have said it is most likely federal and state regulators will require sales in Northern Nevada where the companies together have four casinos. Also, divestitures could be ordered in Las Vegas. That would be a major problem for Harrah's, since President Gary Loveman said a primary goal of the deal was to increase his company's presence on the Strip.

Wall Street analysts said the acquisition is also likely to draw tough scrutiny in New Jersey, where Harrah's and Caesars combined operate five casinos.

A forced sale is also a near certainty in Indiana, which prohibits a company from operating more than two riverboats. Harrah's already owns casino boats in East Chicago and Hammond and the merger would give Harrah's a third boat -- Caesars Indiana along the Ohio River near Louisville, Ky., meaning one of the three casinos would have to be sold, the Associated Press reported.

Louisiana could also require some forced sales because the two companies combined will operate five casinos, even though the state is known for its lax regulatory environment.

Mississippi, where the companies have six casinos and where Caesars already has been rumored to be trying to sell properties, could be more of a problem.

The opt-out clause also allows Caesars to back out if it receives a more favorable bid, which Wall Street analysts said isn't likely.

The agreement, filed with the SEC late last week, includes a $180 million breakup fee that would have to be paid if Harrah's cancels the deal, and sets a deadline of July 14 to complete the buyout, with a possible three-month extension under certain circumstances as long as the two companies agree.

Altogether, Harrah's agreed to pay $1.8 billion in cash and exchange about $3.4 billion in Harrah's stock, and assume about $4.2 billion in Caesars debt.

When the deal closes, Harrah's has agreed to pay Caesars shareholders either 0.3247 in Harrah's shares, worth about $16.94 a share, or $17.75 a share in cash, the filing said.

Hausler said some mutual funds that own stock in Caesars will not be able to hold shares in Harrah's.

"Harrah's doesn't meet some criteria, like being deep value stocks," he said, referring to shares in companies that "have been beaten up" and are considered undervalued by Wall Street.

Also when the deal is done, Caesars President Wally Barr will get almost $20 million under so-called change-of-control provisions in his contract, including getting his $1 million salary for another two years, and another $6.6 million if he leaves "for good reason" in the meantime. Barr was notably absent from last week's conference call with Wall Street analysts after the deal was announced.

Hausler said such "golden parachutes" are standard operating practices, although Barr's is generous relative to his salary.

However, Hausler said the gross amount reflects the value of the options in Caesars stock that Barr has accumulated.

Under the agreement, up to four members of Caesars' board of directors could be added to the Harrah's board following the sale, including Caesars Chairman Stephen Bollenbach and board member William Barron Hilton.

Stephen Crown, one of Caesars' largest shareholders, has also been mentioned as a third candidate for a board position.

Caesars executives declined to comment Monday; Harrah's officials could not be reached.

Harrah's closed Monday at $45.98, down 87 cents on 2.4 million shares, double normal trading volume. Caesars closed at $14.90, down 9 cents on 9.5 million shares, triple normal trading volume.

THE STRIP: Harrah's has an Out in Merger is republished from