News

Harrah's bought for $27.8 billion

21 December 2006


Harrah's Entertainment has accepted a $27.8 billion buyout from private equity firms Apollo Management Group and Texas Pacific Group. The deal values Harrah's at $90 a share and marks the largest transition of a publicly held casino company into private hands.

The offer represents a 36 percent premium over Harrah's closing share price on September 29, 2006, the last trading day before disclosure of the initial offer made by Apollo and Texas Pacific to acquire Harrah's for $81.00 per share.

The two private equity firms will assume Harrah's $10.7 billion in debt, and the transition process is likely to grow the debt to about $21 billion.

"Long-term growth strategies could be slowed due to large debt payments," said Brad Polan, gaming industry analyst for Casino City.

"Then again, privatizing allows Harrah's to raise necessary capital to aggressively expand and grow," Polan added.."If Harrahs' goal really is long term growth as they have stated, then the deal makes sense because they don't have to concern themselves with making money now to appease shareholders. They no longer have to meet short term goals and can focus on long term goals."

Harrahs' CEO Gary Loveman says the sale is simply a change in ownership, not a change in direction. "In Apollo and TPG, we will have owners who share our vision for Harrah's, are fully supportive of our current strategy and are committed to helping us execute on it," he said.

Harrah's board of directors has approved the agreement and recommends that Harrah's stockholders vote in favor of it.

"Taking a long-term perspective, we believe we will be able to help Harrah's deliver on its growth strategy," said David Bonderman, a founding partner in Texas Pacific.

Fort Worth-based Texas Pacific was founded in 1992 and manages more than $30 billion in assets. The company's holdings have included Burger King, Petco, Continental Airlines, America West Airlines, Metro-Goldwyn-Mayer and more.

Texas Pacific's partner in the deal, Apollo Management, was founded in 1990 and has since invested more than $16 billion in a variety of industries in the U.S. and internationally. The firms holdings include AMC Entertainment, GNC and more.

"Together with our private equity partners, we look forward to building on Harrah's successful track record of operational success and helping the company to achieve its strategic goals," said Leon Black, a founding partner in Apollo.

Neither Apollo nor Texas Pacific has ventured into the gaming sector before now.

The merger agreement gives Harrah's the ability to continue to seek better deals from third parties for another 25 days, and Harrah's board has confirmed that it intends to do just that.

Penn National Gaming had competed with Apollo and Texas Pacific for the purchase of Harrah's, trumping their original $81 per share offer with an $87 per share offer of its own last month.

"I don't think Harrah's is likely to receive a higher bid," said Polan. "Harrah's board has gone through a long complete process to achieve this highest offer."

Should no better offers be found, the sale to Texas Pacific and Apollo will require stockholder and regulatory approval and is expected to reach completion in about one year.

Harrah's received $4.7 billion in revenue in the first half of 2006 making it the largest casino operator in the world in terms of revenue. The company operates 39 casinos in the U.S. as well as one in Canada and one in Uruguay. It is also engaged in the process of acquiring London Clubs International.

Selling some its casinos may be one route Harrhah's could take to reduce some of its debt.

"We believe the new owners will look to shed some noncore assets, such as the Rio, Showboat (in Atlantic City), and others, before the closing or shortly thereafter," said Robert LaFleur, an analyst with Susquehanna Financial Group in an investors note Wednesday morning.