It's hard to say what we think of this deal. As far as we can tell, no one really knows what to make of it. Even the deep insiders in Harrah's are divided about it (as you'll see; keep reading).
First of all, it's a first. The gambling industry has never seen a transaction like it, either in scope ($27.8 billion) or mode (a highly leveraged buy-out from private equity firms outside the business). It's so massive, in fact, that it's the sixth biggest buy-out transaction of all time.
Second, it comes as something of a surprise. Given Harrah's ravenous appetite for acquisitions, it's a bit of a head-scratcher that the company itself is being acquired.
Third, the analysts seem to be polarized. On the negative side, the pundits point out that Harrah's goes from being a moderately leveraged company to a highly leveraged company. Debt will climb from roughly $10.7 billion up to more than $21 billion, eight times operating profits. That's a lot of debt. In turn, equity will shrink from $14 billion to less than $7 billion. As a result, corporate rating services have downgraded Harrah's a notch or two to reflect the much higher debt-to-equity ratio and the cash-flow challenges that presents.
Fourth, some analysts believe that Harrah's growth plans will have to go on the back burner as the new company prioritizes debt repayment. Also, Harrah's plans to develop its center Strip monopoly into a metaresort are now in abeyance. In the meantime, MGM Mirage and Boyd Gaming aren't sitting idly by, waiting to see what happens. They're marching forward and developing their own metaresorts; MGM Mirage's CityCenter is already selling residences and is little more than two years away from opening.
Fifth, a couple other potential omens are worth noting. Three top Harrah's executives have left the company since the deal was announced last month. The long-time chief operating officer resigned, citing the "changing nature" of the company as one of his reasons. The senior vice president of operations also resigned. And the Central Division president retired.
In addition, shareholders, predictably, are suing, alleging a wide-ranging conspiracy among 13 private equity firms to hold down the price of Harrah's stock during the high-profile acquisition. According to Bloomberg, "At $90 a share, Texas Pacific and Apollo would be paying less for Harrah's earnings than what Las Vegas Sands' or MGM's profits are worth on the stock market. Harrah's is being valued at 21.4 times projected 2007 earnings. That compares with a 23.1 ratio for MGM Mirage and 51.5 for Las Vegas Sands Corp." The Harrah's board has till January 13 to solicit bids from other suitors. But none have been forthcoming so far.
On the positive side, both the private equity firms that are acquiring Harrah's, Texas Pacific Group and Apollo Management, are well-respected buyout and turnaround specialists. Between them, they list Continental Airlines, Burger King, Vail Resorts, Neiman Marcus, Linens 'n Things, J. Crew, and GNC Corp. as companies that they've helped become major players in their industries.
And they've got a lot of assets to play around with. Harrah's owns 42 casinos in eight states; it also operates four tribal casinos and one Canadian property. Overseas, it owns 11 casinos in Egypt, South Africa, the U.K., and Uruguay, and is opening locations in the Bahamas, Slovenia, and Spain. The new company could raise billions immediately, simply by selling off its stray casinos, such as the Rio (Las Vegas), Showboat (Atlantic City), and Harvey's (Lake Tahoe), in favor of concentrating on its Harrah's, Horseshoe, Caesars, and World Series of Poker brands.
And, analysts point out, cash flow is cash flow. Harrah’s generates well over a billion dollars a year of it, which, in addition to divesting of expendable assets, can go a long way toward propping up the company till it lands solidly back on its feet. And when it does, it’ll be private, not subject to the vagaries of Wall Street and stockholders and public opinion.
Harrah's began as a little bingo parlor in Reno in 1937; this year, it’ll celebrate its 70th anniversary. That’s a long long time in the gambling business. It was privately held for 53 years (till 1990), then publicly for 16. This company has been through just about everything it’s possible to go through.
It remains to be seen how this latest incarnation will play out. Will it hobble Harrah’s enough to be bypassed by MGM Mirage? Or will it signal a new era in highly leveraged buy-outs of the biggest gambling companies? Only time will tell.
