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Posted At : November 3, 2008 12:10 PM | Posted By : D McKee
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Wall Street,Harrah's
Today's New York Times has a "Dealbook" piece on the pickle faced by private equity funds and the companies they own. Among the latter, it cites Mervyn's and Linens 'n Things as two that are circling the drain -- and Harrah's Entertainment as one that hopes to avoid the same fate (Chapter 11). Not only has Harrah's seen its value marked down in the current bond market, it's having to pay its extant debt with ... more debt. That puts it in the same barrel as five other companies held by Apollo (Mis)Management, the firm that cratered Linens 'n Things, to put it kindly.
Need it be repeated that the LBO of Harrah's was not only superfluous but stupendously ill-advised? As the NYT puts it, the selling point for that sort of deal is that it will pay for itself "by cutting costs ... improving operations and then turning around and selling." But Harrah's already enjoyed a reputation as gaming's most efficient company. Oh, and by going private it would supposedly be immune to Wall Street's short-term fixations and have access to oodles of cash with which it could expand.
But Harrah's was so overwhelmingly encumbered with debt (from $12.4 billion to $23.9 billion) by the time CEO Gary Loveman was done steering the LBO into port that new projects became moot. Besides, with scant fat to trim, Harrah's has resorted to sweating comps and maintenance instead. With Harrah's running at a loss thanks to its crushing debt-service levels, you have to wonder where Apollo and Texas Pacific Group are getting the return on profits that their investors expect -- especially when there are no profits, period.
According to the Times, Harrah's bonds are trading at 16.5 cents on the dollar, "indicating investors' belief that the company was drawing closer to a potential default." If that fear should become reality, will anybody at Harrah's step forward and accept blame for the debacle?
Bueller? ... Bueller? ... Bueller?
IPO time. This company will become public again.
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