Hotel & Motel Management: Gaming acquisitions continue with Harrah's, Caesars deal

LAS VEGAS -- Less than one month after MGM Mirage said it would acquire Mandalay Resort Group to form the world's largest gaming company, Harrah's Entertainment announced it wants to acquire Caesars Entertainment. The $9.44-billion deal would supplant the proposed MGM-Mandalay company as the world's largest gaming company before it even gets off the ground.

Both deals require regulatory and governmental approvals, which analysts say might be harder to achieve due to the potential scope of the two dominant gaming companies.

Harrah's operates 28 casino resorts, about 1.7 million square feet of gaming space and 15,650 hotel rooms. Caesars has 28 casino resorts, including four properties on the Las Vegas Strip, about 2 million square feet of gaming space and about 26,000 hotel rooms. If MGM Mirage and Mandalay combine, the surviving company would own and operate 28 casino resorts, including 11 hotel casinos on the Strip, and more than 41,000 hotel guest-rooms, including 49 percent of the rooms on the Strip.

If the Harrah's deal is approved, Caesars shareholders will get $1.8 billion in cash and 66.3 million shares of Harrah's common stock. The $9.44-billion transaction value includes assumption of Caesars debt. There is a $180 million breakup fee in case the deal does not go through.

The MGM Mirage/Mandalay deal would be about $7.9 billion.

"The strategic merits of this deal are clear, compelling and very easy to characterize," said Gary Loveman, Harrah's president and c.e.o., in a conference call. "We are acquiring assets in very desirable locations with largely similar customers to our own. We feel strongly that we will be able to improve the performance of these assets through the deployment of capabilities proven to enhance loyalty and operating efficiency.

"These are the right assets for us. They are worth more in our hands than in the incumbent's hands. And we believe we acquired them at a reasonable price."

Loveman said he is especially excited about Harrah's potential new position in Las Vegas with the addition of four casinos on the Strip. Harrah's owns two Las Vegas properties--Harrah's Las Vegas, which is on the Strip, and the Rio All-Suite Casino Hotel, which is not on the Strip.

The four Caesars properties and Harrah's Las Vegas are located near the center of the Strip, offering revenue and cost synergy potential, said Tim Wilmott, Harrah's c.o.o., in a conference call.

"This gives us critical mass along the new monorail," Wilmott said. "The opening of the new monorail will lead to improved performance. We will have the first three stops on the Strip from the convention center."

Las Vegas opened the first leg of its new monorail system in July.

The acquisition also provides critical mass for Harrah's in Atlantic City, N.J., where Caesars has three casinos.

"Bally's and Caesars give us strategic positioning in the center boardwalk to complement our two existing locations [Harrah's Atlantic City and Showboat]," he said.

Atlantic City has tremendous long-term potential as a regional destination center, Loveman said. Caesars also has three casinos in northern Nevada, five in Mississippi, one each in Delaware, Indiana, New Orleans and Ontario, Canada, and nine overseas.

The combined company would focus on three primary brands--Harrah's, Horseshoe and Caesars. Harrah's recently completed a $1.45-billion merger with Horseshoe Gaming Holding Corp., which added hotel/casinos in Louisiana, Mississippi and Indiana. Harrah's sold its Shreveport, La., hotel/casino to Boyd Gaming Corp. for $190 million to appease regulators.

The Harrah's-Horseshoe merger made Harrah's the largest casino company in the world, grabbing the title from Caesars. The proposed MGM Mirage/Mandalay deal would surpass the current Harrah's, but not the combined, proposed Harrah's/Caesars company.

"Caesars is an excellent addition to our portfolio, providing us with the opportunity to create tremendous long-term value for our shareholders," Loveman said. "I believe the purchase price is fair to both sides."

"This is an outstanding transaction for both parties," said Steve Bollenbach, chairman of Caesars Entertainment, in a prepared release. "Harrah's strong leadership and operating proficiency will take Caesars' assets to another level of performance. The transaction delivers excellent value to our shareholders."

The deal would achieve $80 million in synergies the first year, according to Chuck Atwood, Harrah's c.f.o.

"We expect this figure to grow substantially as we integrate systems," Atwood said in a conference call.

Despite assuming $4 billion in Caesars' debt, Harrah's expects to maintain its investment-grade credit rating, he said. Harrah's will devote some cash flow to reduce debt so that the company's credit returns to its traditional levels.

"We recognize we will need to sell one of our Indiana properties, but that will not be the Horseshoe," Atwood said. "We will make asset divestitures as required to meet regulatory approvals."

Analysts estimate 2005 earnings before interest, tax, depreciation and amortization for Harrah's of about $1.35 billion and EBITDA for Caesars of about $1.2 billion for a combined entity of $2.55 billion. The combined debt will be about $11.3 billion.

"Due to the synergies and improved growth prospects, the combined company has superior prospects than as stand-alone companies," Atwood said.

Synergies would be achieved by reducing redundant corporate expenses, Loveman said.

View from Wall Street

Several analysts said this was a defensive move in response to the proposed merger between MGM Mirage and Mandalay.

"A cynic might say they did the deal to draw attention not only to them, but to the MGM/Mandalay merger," said Rod Petrik, lodging gaming analyst for Legg Mason, a global financial services company based in Baltimore. "If both deals go through, MGM and Harrah's will have more than 65 percent of the rooms and more than 80 percent of overall revenue on the Strip. It also gives them a lot of overlap in other markets."

If approved, Harrah's would own five gaming licenses in Atlantic City and would control half the Atlantic City guestrooms, including two-thirds of the Boardwalk guestrooms, Petrik said. The company would have three gaming licenses in Indiana, four in Lake Tahoe, Nev., and two in Louisiana.

"They have a lot of work to do with state regulators," he said. "If they are forced to shed assets, that will create opportunities for regional operators. The private equity capital markets in the gaming business is a pretty small business, but is about to get a lot bigger because a lot of smaller companies will be looking to pick us some assets."

Petrik agrees with Harrah's contention that they would be more efficient operators of the Caesars properties.

"Over the last few years that has been true," he said. "Harrah's is the only gaming company with investment-grade credit and they have a strong balance sheet."

Brand breakdown

Brand names in the portfolios of the proposed $9.44-billion deal between Harrah's Entertainment and Caesars Entertainment:

Harrah's

* Harrah's

* Horseshoe

* Harveys

* Rio

* Showboat

Caesars

* Bally's

* Caesars Palace

* Flamingo

* Paris

* Grand

* Hilton

At a glance

Company                  Casino resorts   Hotels   Guestrooms

Harrah's Entertainment         28           22       15,650
Caesars Entertainment          28           23       26,106

Las Vegas profiles

Company                  Casino hotels   Guestrooms

Harrah's Entertainment         2            5,077
Caesars Entertainment          4           11,665

Source: H&MM Research

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