Harrah's Offered Buyout

Harrah's Entertainment received a $15.05 billion offer for the company from two private-equity firms in what would be the biggest deal ever for a casino operator and the fifth-largest leveraged buyout in history.
Harrah's said Monday that Apollo Management and Texas Pacific
Group are offering $81 per share in cash, a 22 percent premium to
Harrah's closing stock price Friday on the New York Stock Exchange.
Harrah's shares surged $9.25, or 13.9 percent, to close at
$75.68 on Monday on the New York Stock Exchange.
Harrah's said it had not committed to the deal, but it
established a special committee of independent directors to review
the offer and retained UBS Securities LLC as an adviser.
The company did not respond to calls for comment.
Harrah's operates about 40 casinos throughout the country,
including Caesars Palace in Las Vegas, and other casinos under the
names Ballys, Horseshoe and Showboat. The Las Vegas-based company
beefed up its portfolio with last year's purchase of Caesars
Entertainment Inc., giving it an upscale offering on the Las Vegas
Analyst Rod Petrik of Stifel Nicolaus said Harrah's shares had
been relatively cheaper than its peers in the casino business for
several reasons, "perhaps none more important than its inability
to crack into the growing Asian gaming markets."
Gambling companies' shares also appeared cheaper than shares in
other sectors, providing a prime target for private equity
investors, he said in a research note.
Celeste Brown of Morgan Stanley said the benefit of a possible
deal would be in managing and expanding the Harrah's network of
casinos rather than selling off the parts.
"Neither a reduction in investment or asset sales (unless they
maintain management contracts) makes sense if the value is to be
realized," she said in a research note.
New York-based Apollo Management, with some $10.1 billion in
funds under management, did not immediately respond to a request
for comment. A spokesman for Texas Pacific Group, with more than
$20 billion in funds, had no comment.
If the deal is consummated, it would be the fifth-largest
leveraged buyout ever, excluding assumed debt of $10.7 billion,
according to data from Thomson Financial. The largest ever was RJR
Nabisco Inc.'s $25 billion acquisition by Kohlberg Kravis Roberts &
Co. in 1998.
Private equity funds have been buying into the casino industry
since 1998 when Los Angeles-based fund Colony Capital bought
Harveys Casino Resorts for $420 million, and followed up with the
$280 million purchase of the Las Vegas Hilton casino-hotel in 2004.
A combination of casinos' valuable real-estate holdings and cash
generating power has proven attractive to private funds, but the
latest deal would be the biggest in the industry's history, said
Roger Aguinaldo, publisher of The M&A Advisor.
Its hefty size is also seen as convenient to global private
equity firms, which amassed some $750 billion in funds last year,
he said.
"It's like dry powder, if you will, and they're looking for
deals," Aguinaldo said.
The two funds have retained Las Vegas law firm Schreck Brignone
to clear regulatory hurdles, which could take nine months to a
year, said partner Frank Schreck. Aside from the funds, a separate
company would likely need to be created to control Harrah's voting
shares, he said. For now, the venture is simply called "Project
Hamlet," he said.
Other gambling stocks surged on the news.
Shares in the world's second largest casino company, MGM Mirage
Inc., rose $1.20, or 3 percent, to $40.69. Las Vegas Sands Corp.
fell, however, by 58 cents to $67.77, while Wynn Resorts Ltd. rose
74 cents, or 1.1 percent, to $68.75.
Also on Monday, Harrah's said it entered into a deal with a unit
of Boyd Gaming Corp. to exchange about 24 acres that Harrah's
controls on the Las Vegas Strip for Boyd's Barbary Coast Hotel and
The Barbary Coast has long been sought by Harrah's because it is
on 4.4 acres on the Strip between several Harrah's properties,
including Imperial Palace, Flamingo, Ballys and Paris.
It was the last major piece of property standing in the way of a
massive redevelopment project linking Harrah's holdings on the
Strip, which the company was to announce before the end of the
Boyd Gaming spokesman Rob Stillwell said the straight-swap deal
would give Boyd 87 contiguous acres on the Strip, of which it had
already assembled 63 acres on the Stardust casino-hotel site for a
planned $4 billion megaresort called Echelon Place.
"This doesn't change any of our plans for Echelon as it stands
now," Stillwell said. "The additional acres, what it does is
provides us the opportunity to develop future phases related to
Echelon as well as extending our growth pipeline well into the next
Boyd shares jumped $2.11, or 5.5 percent, to $40.55. Shares in
Station Casinos Inc., Boyd's rival in the Las Vegas residents
market, rose $2.23, or 3.9 percent, to $60.06.
The real-estate transaction is expected to close in the first
quarter of 2007, subject to customary closing conditions, including
government approvals. Boyd said it expects to see a non-cash gain
of about $280 million in the quarter the deal closes.