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Rod Smith

Wall Street Reacts Negatively to Merger

16 July 2004

NEW YORK -- Wall Street reacted swiftly and negatively to Thursday morning's announcement of the gaming industry's latest megadeal creating a gaming behemoth with annual revenues of more than $9 billion.

"It's the opposite of the Odd Couple," one analyst who asked not to be named said of the Harrah's Entertainment agreement to buy Caesars Entertainment for about $9.4 billion.

"The two companies have such similar profiles they'll get scale but they won't get any synergies" like MGM Mirage expects from the Mandalay Convention Center when it completes its pending $7.9 billion purchase of Mandalay Resort Group, he said.

"Strategically, it's just not anywhere nearly as good a deal as the Mandalay deal, especially financially," the analyst said.

Investors agreed with the analysts' criticisms, sending both companies' stock down sharply on Thursday.

Harrah's closed Thursday at $47.91, down $3.07, or 6 percent, on 9.9 million shares, 10 times normal trading volume. Caesars Entertainment closed at $15.05, down 95 cents, or 6 percent, on 36.5 million shares, 13 times normal trading volume.

Another analyst called the deal a "poor cousin" for Caesars investors compared with the MGM Mirage-Mandalay merger.

Others said the agreed-upon price of about $16.96 per Caesars share is below the fair market value of $18 or $18.50 a share, and noted that the deal is structured so even that price can drop if investors keep dumping Harrah's stock.

"They didn't do such a good job in maximizing share price," one analyst said.

Under the agreement approved by both companies' boards late Wednesday night, Harrah's agreed to assume approximately $4.2 billion in Caesars debt and pay $1.8 billion in cash plus 66.3 million of its shares, worth about $3.4 billion.

However, Harrah's Chief Financial Officer Chuck Atwood said in a Thursday morning conference call with analysts that the agreement includes no "collar," or minimum share price, so the price of the deal could drop, or increase.

Analysts and industry insiders were surprised by the lack of a collar that would kill the deal or adjust the price if Harrah's stock drops significantly. Instead, the agreement requires the buyout to proceed regardless of Harrah's stock price.

"I'm surprised. There's always a collar. The price of Harrah's stock can fall to the gutter and they'll just get Caesars at a bargain," said one Wall Street analyst who asked not to be named.

"It's just a bad deal. I have no idea why they did it," another source close to the negotiations said.

Some analysts said Caesars Entertainment co-chairman Stephen Bollenbach and Harrah's President Gary Loveman were the driving forces behind the sales negotiations.

"But I don't know if they listened to any of their executives. With no collar, the deal doesn't smell right and you notice (Caesars Entertainment President) Wally Barr wasn't even in on the conference call (with analysts Thursday)," one analyst said.

Sources close to the negotiations said the talks, which began four weeks ago after the MGM Mirage-Mandalay deal was announced, were friendly at the board level but hostile at the management level.

A local industry insider who called it a "horrible deal" said: "Caesars people just rolled over and Loveman should have his head examined."

"Bollenbach wanted it to go and they went. The MGM Mirage-(Mandalay) merger is a big deal. This is a non-event," he said.

Executives from both companies were unavailable for interviews Thursday.

Harrah's Chief Operating Officer Tim Wilmott and Chief Financial Officer Chuck Atwood joined Loveman on the conference call. No executives from Caesars participated in the conference call.

Loveman said the purchase of Caesars Entertainment, the largest buyout in the history of the gaming industry, will solidify Harrah's position as the premier gaming company in the United States.

He also called the financial terms fair to both companies although he acknowledged that there would be difficulties integrating the two companies.

Nevertheless, he said Caesars Entertainment has "the right assets" that mesh well with Harrah's expansion plans, that Harrah's can manage the assets better "than the incumbent," and that they are being bought at a "reasonable price."

Loveman said Harrah's will mainly operate under the Harrah's, Horseshoe and Caesars brands.

Harrah's recently completed its $1.45 billion merger with Horseshoe Gaming Holdings Corp., which operates riverboats in Bossier City, La.; Tunica, Miss.; and Hammond, Ind.

Wilmott added the Caesars properties are particularly attractive, except for the high-end casino areas at Caesars Palace, which will have to be reviewed during the integration process and may be closed.

Joe Greff, gaming analyst at Fulcrum Global Partners, an independent Wall Street investment research firm, said other negatives of the proposed deal include the likelihood the new company will have to sell off many casino operations in Atlantic City, Mississippi, Nevada outside the Strip and Indiana because of overlapping properties and antitrust concerns.

He said the possibility of divestitures is particularly troubling because Harrah's will be in a "forced sale" situation and will not be able to get prices that represent the same multiple of price to cash flow that the Caesars Entertainment purchase will likely command.

However, Greff said there are also likely to be substantial benefits from the deal if it goes through.

"We understand Harrah's desire in wanting a stronger Las Vegas Strip presence, a stated goal, in order to export Harrah's gamers from around the country to the Strip," he said in an advisory to investors Thursday.

In addition, he said Harrah's use of its total rewards program technology and database management is unparalleled, so the merger should put the combined company in a position to increase market share and financial returns.

Merrill Lynch analyst David Anders said the deal also makes sense strategically because of potential cost savings, improvements that have been made at Caesars Palace in Las Vegas and the chance to own three large casinos in Mississippi.

"However, we believe that obtaining approval from the New Jersey Gaming Board could be the largest hurdle," he said, referring to the antitrust issues that will be raised.

Analysts expect federal and state authorities will carefully review the proposed merger for its possible anti-competitive impact.

Harrah's Entertainment operates 28 casinos in 13 states under the Harrah's and Showboat names and has about 41,000 employees. Caesars operates 28 properties worldwide and has about 54,000 employees.

The agreement announced Thursday is still subject to approval by shareholders and state and federal regulators. The deal is expected to close in about a year.

Wall Street Reacts Negatively to Merger is republished from