Analysts skeptical of reported Penn National bid for Harrah’s

Las Vegas (AP) – Analysts poured water Wednesday on reports Penn National Gaming Inc. was in talks to enter a bidding war for casino giant Harrah’s Entertainment Inc., noting such a bid would not likely come from a company more than four times smaller.

JP Morgan analyst Harry Curtis titled a research note: „Jonah Swallowing the Whale? We Think Not.“

Penn’s market capitalization is USD 3.2 billion; Harrah’s, USD 14.7 billion.

„An acquisition of (Harrah’s) would be a wide departure from the philosophy that has made Penn successful in the first place, which is to pursue strategic and accretive acquisitions at a disciplined and measured pace,“ Curtis wrote.

The Wall Street Journal reported Wednesday that Penn and Harrah’s were holding talks in Las Vegas to review Harrah’s operations, citing unnamed sources familiar with the matter.

CNBC earlier reported that Wyomissing, Pa.-based Penn was considering a bid with cash and stock, with partners D.E. Shaw & Co., Lehman Brothers Holdings Inc. and Wachovia Corp. covering the cash portion of the bid in return for an equity stake.

Neither Harrah’s nor Penn officials would comment on the reports. A D.E. Shaw & Co. spokeswoman also declined to comment.

In Wednesday trading, Penn shares fell 86 cents, or 2.3 percent, to close at USD 37.30 on the Nasdaq Stock Market, while Harrah’s shares closed up 46 cents, or 0.6 percent, at USD 78.92 on the New York Stock Exchange.

Harrah’s already is the target of a buyout bid for USD 81 a share, announced Oct. 2, by private equity firms Texas Pacific Group and Apollo Management. The offer would value Harrah’s at USD 15.05 billion. The offer was reportedly increased to USD 83.50 a share, or about USD 15.5 billion, a figure the company has not confirmed.

Analyst Rod Petrik of Stifel Nicolaus & Co. said he doubted Penn, a casino and horse racing-track operator with operations in 12 states and Canada, could offer more.

„I would be surprised if they were able to match or surpass the bid that can be put together by Apollo and Texas Pacific,“ he said. „I would imagine part of Texas Pacific and Apollo’s bid would be keeping the bulk of management in place and making them partners. I don’t know if Penn National has that capability.“

Additionally, D.E. Shaw already has its hands full with a joint USD 262.5 million takeover offer for casino operator Riviera Holdings Corp. with real estate developer Ian Bruce Eichner, he said.

Dennis Forst of KeyBanc Capital Markets said that while the Penn bid „is possible,“ a deal for Harrah’s was more likely to be led by company officials in a buyout or from the original private equity bidders. Forst said he wouldn’t be surprised if a deal would be closed at above USD 90 per share.

Penn already was burdened heavily by debt, so making a leveraged buyout might upset its shareholders, he said.

He added that news of the talks about Harrah’s operations may have been made public to extract a higher bid from Texas and Apollo.

„I would be shocked if half a dozen other companies weren’t doing the exact same thing, meeting, talking,“ he said. „Somehow this one came out.“

Penn operates 12 casinos, seven race tracks and seven off-track wagering facilities. It has said it wants to enter the Las Vegas and Atlantic City, N.J., markets.

Harrah’s is the world’s largest casino company by revenue, operating 39 casinos nationwide, including Caesars Palace, Bally’s and Paris on the Las Vegas Strip, and Caesars and Harrah’s in Atlantic City.

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