Las Vegas (AP) — Harrah’s Entertainment received a USD 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 USD 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 USD 9.25, or 13.9 percent, to close at USD 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 Strip.
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 USD 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 USD 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 USD 10.7 billion, according to data from Thomson Financial. The largest ever was RJR Nabisco Inc.’s USD 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 USD 420 million, and followed up with the USD 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 USD 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 USD 1.20, or 3 percent, to USD 40.69. Las Vegas Sands Corp. fell, however, by 58 cents to USD 67.77, while Wynn Resorts Ltd. rose 74 cents, or 1.1 percent, to USD 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 Casino.
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 year.
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 USD 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 decade.“
Boyd shares jumped USD 2.11, or 5.5 percent, to USD 40.55. Shares in Station Casinos Inc., Boyd’s rival in the Las Vegas residents market, rose USD 2.23, or 3.9 percent, to USD 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 USD 280 million in the quarter the deal closes.