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Casino Industry: Harrah's Continues Expansion

1 Sep 2006

By Howard Stutz

LAS VEGAS -- Las Vegas-based Harrah's Entertainment, which previously announced plans to build casinos in Spain and Slovenia, is looking at a further European expansion with an announcement Thursday that it is acquiring London Clubs International for $530 million.

The transaction, in which Harrah's would purchase all outstanding shares of London Clubs, which operates six casinos in the United Kingdom and has five more under development, is expected to close by year's end. The British company also operates two casinos in Egypt, a casino in South Africa and consults with a casino in Lebanon.

London Clubs' board of directors unanimously approved the deal and asked shareholders to vote in favor of the buyout.

Harrah's, which operates Strip icon Caesars Palace and six other Las Vegas resorts, has almost 40 casinos in 12 states and Canada.

The company has been trying to expand internationally over the past year. Harrah's lost a bid to Las Vegas Sands Corp. for a casino site in Singapore in April but is bidding on a second casino site in the city-state. Harrah's has also been exploring the possibility of a joint venture for a casino in Macau.

"We believe it makes strategic sense for Harrah's," Deutsche Bank gaming analyst Bill Lerner said in a note to investors Thursday. "It allows Harrah's to further expand its footprint internationally. Harrah's could utilize the Caesars brand, exploiting new cross-marketing opportunities and tapping into London Clubs' focus on high-end play."

In a statement, Harrah's Entertainment Chairman Gary Loveman said the company would keep London Clubs' management on board to operate the company as a Harrah's subsidiary.

"London Clubs has a strong collection of properties that are well-positioned in the United Kingdom's evolving regulatory framework," Loveman said. "Under Harrah's ownership, these international properties will even be stronger in the future."

Harrah's said Banc of America Securities is acting as the sole financial adviser for the transaction, which the London Bureau of CBS MarketWatch reported was valued at 27 percent higher than the closing stock price of London Clubs on Wednesday.

Gaming analysts said the purchase allows Harrah's to be in a better position than its rivals if the United Kingdom liberalizes its gaming market. British laws will now allow only one Las Vegas-style casino to be built. Last week, Harrah's partners abandoned a bid for the casino in Wembley because of local opposition.

"This looks more like a strategic acquisition for Harrah's that may take some time before it bears fruit," Goldman Sachs gaming analyst Steven Kent said in a note to investors. "Although the acquisition is rather expensive, in the short term it strengthens its international portfolio, in the medium term it better positions Harrah's to win one or more of the 17 casino licenses that will be issued as a result deregulation."

Kent added the deal could make Harrah's the gaming industry's top beneficiary if further deregulation occurs in the next three to five years.

Standard & Poor's changed its outlook for Harrah's to "negative" from "stable" in response to the bid and the possibility of increased debt. S&P affirmed its BBB- rating for Harrah's long-term debt and A-3 rating for its short-term debt.

Harrah's shares closed the session at $62.36, up $1.92 or 3.18 percent on the New York Stock Exchange. Shares of London-based London Clubs jumped 33.75 pence, or 34 percent, to 132.5 pence in London.

Bloomberg News contributed to this report.

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