Waiting starts after bid

As the dust settled Tuesday around the massive buyout offer for Harrah’s Entertainment, analysts speculated that nothing would change for the world’s largest casino operator until company directors decide what to do with the USD 15 billion proposal.

Texas Pacific Group and Apollo Management have offered to buy all Harrah’s Entertainment’s stock for USD 81 a share. Even if the bid is accepted, one gaming analyst thought it was possible that the Harrah’s management team could remain in place to operate the company.

„Who would be better to sell the story about the direction and vision of the company than the current management group?“ said Dennis Farrell of Wachovia High Yield Research. „I think (Harrah’s Chairman Gary Loveman) is the linchpin to this whole deal.“

Harrah’s, which operates 37 casinos in 13 states, has development opportunities in design and planning for several American jurisdictions. The company also is seeking to expand internationally; it has announced projects in Slovenia and Spain, and a proposal in Singapore.

For the short term, until a special committee made up of the nonmanagement members of Harrah’s governing board makes a recommendation on the offer from Apollo Management and Texas Pacific Group, life at the Las Vegas-based company will continue somewhat unabated.

„(The deal) is not even finalized yet, so Harrah’s management can’t assume anything,“ said Matthew Jacob, an analyst for Majestic Research. „Harrah’s has a duty to its shareholders and it will probably be business as usual until something happens.“

Farrell said that even if the buyout is accepted, the length of time it would take to close the transaction — estimated by analysts at between 18 months and two years — means Harrah’s management would have to stay the course.

„If a deal is finalized, there may be some things Harrah’s can and can’t do until the transaction closes,“ Farrell said. „But right now, all that is just speculation.“

Jefferies & Co. analyst Larry Klatzkin, in a note to investors Tuesday, agreed that licensing the principals of Apollo and Texas Pacific could take more than a year, especially if the private equity groups desire a say in the gaming company’s operations.

„We highly doubt that these two funds are looking to buy into the largest (leveraged buyout) in history without looking to have a say on how such company will operate,“ Klatzkin said. „Hence, licensing will be a long and lengthy process.“

In the meantime, Harrah’s is expected to continue to proceed with its plans for redeveloping the company’s Strip casinos. Those plans progressed Monday with a separate announcement that Harrah’s signed a deal with Boyd Gaming Corp. to swap Strip casino sites.

Boyd was given 24 acres near the Stardust while Harrah’s picked up the Barbary Coast, the final piece in what could become one of the largest Strip redevelopment projects on record.

Once the transaction closes next year, Harrah’s will control 350 acres in Las Vegas, encompassing the area between Paris Las Vegas to the south, Harrah’s to the north, Koval Avenue to the east and Rio to the west.

Harrah’s Vice Chairman Chuck Atwood said the land cost the company approximately USD 13 million per acre.

„This large site is intended to give us many years of development potential and the flexibility to grow our future earnings without undue interruption of our current earnings stream.“ Atwood said.

But if the buyout takes place, the redevelopment may never come, analysts said. An oft-mentioned plan in which the Imperial Palace is closed and demolished might be put on hold, observers speculated.

„There may be projects that are never announced or started,“ Jacob said. „But the company has to go about business.“

Farrell said the private equity partners could sell some of the real estate holdings or even some of the company’s casinos, if there was a problem with licensing. He said the directors evaluating the offer need to determine whether the true value of the future projects and growth opportunities supersede the USD 81 a share offer.

One development that is continuing as planned is a Nov. 7 vote in Rhode Island on a proposed American Indian casino Harrah’s would operate for the Narragansett Tribe in West Warwick, just outside of Providence.

Harrah’s is bankrolling the USD 5.2 million public relations and advertising campaign in favor of a yes vote on the ballot initiative, but opponents expressed concern about the proposed buyout affecting the company’s future plans. Proponents said the tribe has the flexibility to choose its own casino operating partner.

„If (the tribe) terminated their agreement with Harrah’s, there would be plenty of companies that would be coming forward who want to build a casino in this state if it passes,“ Democratic Rhode Island state Sen. Stephen Alves told the Providence Journal.

Harrah’s is also bidding on a second casino location in the island nation of Singapore. The company was beaten out last spring by Las Vegas Sands Corp. in the bidding for a casino location in Singapore’s marina district.

Analysts thought the Singapore process would proceed, as would Harrah’s plans to purchase London Clubs International for USD 530 million. The London Clubs deal would give the gaming company up to 11 United Kingdom casinos.

Other plans for Harrah’s, including a redevelopment of 50 acres in Biloxi, Miss., could move forward but be ultimately shelved based on the outcome of the buyout proposal. If the buyout goes forward, much will be up in the air.

„There are so many hurdles, that a lot could happen and this could be a very long process,“ Farrell said. „We could see a situation where the private equity group could run into trouble in one jurisdiction. They would probably sell the assets and move on.“

If the deal goes through, Farrell said it could trigger a merger-and-acquisition trend in the gaming industry.

„Gaming is the perfect model for private equity; lots of free cash flow,“ he said.

Shares in Harrah’s, which jumped 14 percent Monday in trading on the New York Stock Exchange because of the buyout news, settled back to reality Tuesday, closing at USD 74.71, down 97 cents or 1.28 percent.