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Bid for Harrah's tops $15.5 billion

12 Oct 2006

By Howard Stutz

LAS VEGAS, Nevada -- A higher bid by two private equity firms seeking to purchase casino giant Harrah's Entertainment didn't surprise gaming analysts, who said Wednesday the initial bid of $81 per share was too low.

The New York Times, citing unidentified sources close to the negotiations, reported Wednesday that New York-based Apollo Management Group and Texas Pacific Group of Forth Worth, Texas, had sweetened the bid for Las Vegas-based Harrah's to between $83 and $84 a share, jumping the buyout bid from $15 billion to more than $15.5 billion.

The newspaper reported that Harrah's company directors had rejected the original week-old offer.

Harrah's spokesman Alberto Lopez would not comment on the Times article Wednesday. In an e-mail exchange, Lopez said there has been "no progress officially" from the board, which had formed a special committee of nonmanagement directors to study the offer.

A spokesman for Apollo Management declined comment, while a spokesman for Texas Pacific did not return a phone call.

Earlier this week, two Harrah's shareholders filed a lawsuit to block the buyout by the private equity groups, saying the $81 price was too low. The pair asked the Delaware Chancery Court to block the deal and force Harrah's to solicit other bids.

The lawsuit alleged that the transaction was "an apparent camouflaged management buyout."

Some analysts have speculated that if the deal were to be completed, Harrah's management team, including Chairman Gary Loveman, would continue to operate the casino company under the ownership of the private equity firms. Many believe a buyout, which would be subject to regulatory approval in all the states in which Harrah's operates casinos, would take between 18 months and two years to complete.

The legal action may be one reason Harrah's and its suitors were silent Wednesday, analysts said.

Rod Petrik, managing director of Stifel Nicolaus in Baltimore, speculated that negotiations were in progress between Harrah's and the private equity groups.

"This is not a bidding war because there are really no other bidders who could step in," Petrik said. "There are obviously negotiations because Harrah's couldn't just accept the initial offer. Reportedly, (the private equity groups) have six or seven banks ready to come in and finance the deal, so this is pretty much a real offer."

In addition to purchasing all outstanding shares, the buyer would have to assume Harrah's debt of about $10 billion. If completed, the transaction would be one of the five most expensive leveraged buyouts ever. Harrah's is the gaming industry's largest casino operator with 39 casinos in 13 states.

Bear Stearns gaming analyst Joe Greff said the new offer was closer to Harrah's current 52-week high stock price of $83.33.

"We are not surprised by the potentially increased offer," Greff said in a note to investors. "We think the board still may seek a couple more dollars per share and note that our estimated 'leveraged buyout fair value range' places a $77 (per share) to $85 (per share) value on the company."

Meanwhile, Merrill Lynch gaming analyst David Anders said the price for Harrah's could go even higher.

"We've fielded a large volume of calls on the proposed purchase ... and consensus seems to be that the current $81 per share offer may be too low," Anders said in an investors note. "To provide perspective, we reworked our leveraged buyout model and believe that the math could work at prices up to $90 per share."

Anders said other factors could kick up the cost of Harrah's to the potential buyers, such as uncollected insurance proceeds.

"In 2005, Gulf Coast hurricanes destroyed or damaged several Harrah's properties in the region, and a significant portion of the insurance claims submitted for those losses remains uncollected," Anders said.

Harrah's shares closed at $76.34 Wednesday on the New York Stock Exchange, down 5 cents, or 0.07 percent. Almost 10 million shares were traded, three times the average daily volume.

An acquisition of Harrah's would be the biggest ever in the casino industry, topping the company's own purchase last year of Caesars Entertainment. Harrah's is the target of buyout firms because its shares are cheap given the amount of cash that flows through its casinos, CRT Capital Group's Steve Ruggiero said.

Harrah's stock trades at 8.2 times 2007 earnings before interest, taxes, depreciation and amortization, Ruggiero said.

MGM Mirage, the world's second-biggest casino company, trades at nine times EBITDA, while Wynn Resorts Ltd. has a 16.1 multiple and Las Vegas Sands Corp. trades at 23.9 times, Ruggiero said.

Bloomberg News contributed to this report.

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