Private equity fund offering $15 billion to purchase Harrah’s |

Private equity fund offering $15 billion to purchase Harrah’s

Ryan Nakashima

LAS VEGAS (AP) – Private equity made a huge foray into the gambling industry on Monday when two firms offered $15.05 billion for the world’s largest casino operator, Harrah’s Entertainment Inc.

The bid, which would be the biggest ever for a casino company and one of largest leveraged buyouts in history, was a step into a sector that private funds have increasingly found attractive for its valuable real estate holdings and cash-generating power.

The Tahoe Daily Tribune attempted to contact communications specialists in Harrah’s corporate office in Las Vegas, but no one was available.

Harrah’s said Monday that Apollo Management and Texas Pacific Group are offering $81 per share in cash, a 22 percent premium to Harrah’s closing stock price Friday on the New York Stock Exchange.

After the news, Harrah’s shares surged $9.25, or 13.9 percent, to close at $75.68 on Monday. The price was off a 52-week high of $83.33 set in May.

If the deal is consummated, it would be the fifth-largest leveraged buyout ever, excluding assumed debt of $10.7 billion, according to data from Thomson Financial. The largest ever was RJR Nabisco Inc.’s $25 billion acquisition by Kohlberg Kravis Roberts & Co. in 1998.

The colossal size of the deal is seen as convenient for global private equity firms, which amassed some $750 billion in funds last year, said Roger Aguinaldo, publisher of The M&A Advisor.

“It’s like dry powder, if you will, and they’re looking for deals,” Aguinaldo said.

Private equity has been buying into the casino industry since 1998 when Los Angeles-based fund Colony Capital bought Harveys Casino Resorts for $420 million, and followed up with the $280 million purchase of the Las Vegas Hilton hotel-casino in 2004. The Harrah’s deal would mark the fifth such venture in recent years.

Frank Schreck, a partner with Las Vegas law firm Schreck Brignone, helped shepherd several such funds through the regulatory process of getting a gambling license, and has been retained by Apollo Management and Texas Pacific Group.

“Nothing even comes close” to the size of the offer, Schreck said. “It won’t be the last, though.”

Regulatory hurdles could take nine months to a year, said the state’s Gaming Control Board chairman, Dennis Neilander.

Aside from the funds, a separate company would likely need to be created to control Harrah’s voting shares, Schreck said. For now, the venture is simply called “Project Hamlet,” he said.

Harrah’s said it had not committed to the deal, but it established a special committee of independent directors to review the offer and retained UBS Securities LLC as an adviser.

The company did not respond to calls for comment.

New York-based Apollo Management, with some $10.1 billion in funds under management, did not immediately respond to a request for comment. A spokesman for Texas Pacific Group, with more than $20 billion in funds, had no comment.

Harrah’s operates about 40 casinos throughout the country, including Caesars Palace in Las Vegas, and other casinos under the names Ballys, Horseshoe and Showboat. The Las Vegas-based company beefed up its portfolio with last year’s purchase of Caesars Entertainment Inc., giving it an upscale offering on the Las Vegas Strip.

Analyst Rod Petrik of Stifel Nicolaus said Harrah’s shares had been relatively cheaper than its peers in the casino business for several reasons, “perhaps none more important than its inability to crack into the growing Asian gaming markets.”

Gambling companies’ shares also appeared cheaper than shares in other sectors, providing a prime target for private equity investors, he said in a research note.

Celeste Brown of Morgan Stanley said the benefit of a possible deal would be in managing and expanding the Harrah’s network of casinos rather than selling off the parts.

“Neither a reduction in investment or asset sales (unless they maintain management contracts) makes sense if the value is to be realized,” she said in a research note.

The announcement could spark other private equity bids in the sector, said analyst J. Cogan of Banc of America Securities, much like the wave of consolidation in the industry has helped push up share prices since 2004.

Other gambling stocks surged on the news.

Shares in the world’s second largest casino company, MGM Mirage Inc., rose $1.20, or 3 percent, to $40.69. Las Vegas Sands Corp. fell, however, by 58 cents to $67.77, while Wynn Resorts Ltd. rose $2.54, or 3.7 percent, to $70.55.

Also on Monday, Harrah’s said it entered into a deal with a unit of Boyd Gaming Corp. to exchange about 24 acres that Harrah’s controls on the Las Vegas Strip for Boyd’s Barbary Coast Hotel and Casino.

The Barbary Coast has long been sought by Harrah’s because it is on 4.4 acres on the Strip between several Harrah’s properties, including Imperial Palace, Flamingo, Ballys and Paris.

It was the last major piece of property standing in the way of a massive redevelopment project to link Harrah’s holdings on the Strip that span some 350 acres, which the company was to announce before the end of the year.

Boyd Gaming spokesman Rob Stillwell said the straight-swap deal would give Boyd 87 contiguous acres on the Strip, of which it had already assembled 63 acres on the Stardust casino-hotel site for a planned $4 billion megaresort called Echelon Place.

“This doesn’t change any of our plans for Echelon as it stands now,” Stillwell said. “The additional acres, what it does is provides us the opportunity to develop future phases related to Echelon as well as extending our growth pipeline well into the next decade.”

Boyd shares jumped $2.11, or 5.5 percent, to $40.55. Shares in Station Casinos Inc., Boyd’s rival in the Las Vegas residents market, rose $2.23, or 3.9 percent, to $60.06.

The real-estate transaction is expected to close in the first quarter of 2007, subject to customary closing conditions, including government approvals. Boyd said it expects to see a non-cash gain of about $280 million in the quarter the deal closes.

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