Markets & Finance

Harrah's: Long Odds on the LBO


It has shades of a 1980s takeover battle. An underperforming company gets an unsolicited buyout offer. The CEO and board huddle to review their options. But, in this case, the target is Harrah's Entertainment (HET), the world's largest casino operator. And the CEO in the hot seat is Gary Loveman, a former Harvard Business School professor who commutes to Las Vegas from suburban Boston, Mass.

On Oct. 2, Harrah's confirmed that it had gotten an unsolicited takeover offer for $81 a share, 22% higher than the stock's closing price on Sept. 29. The all-cash offer, from buyout firms Apollo Management and Texas Pacific Group, would value the company at $26 billion, including $11 billion in debt already on Harrah's books.

The deal underscores the increasing financial clout of private-equity firms and the difficulty hotel and casino companies often have in getting Wall Street to value their businesses. It also illustrates the struggle Harrah's has had in upstaging its peers, who target more upscale gamblers. Harrah's says it has appointed a special committee of nonmanagement board members to evaluate the proposal.

PRIVATE EQUITY'S PARTY. "The Special Committee has not determined that a transaction is in the best interests of Harrah's and its stockholders or that Harrah's should not continue as an independent public company pursuing its business plan as the world's largest provider of branded casino entertainment," the company said in a statement. The stock closed on Oct. 2 at $75, below the buyout price, suggesting the Street doesn't think Harrah's board will approve the offer.

There are several obstacles to taking Harrah's private. Buyers would have to get approval from casino commissions in the 13 states in which the company operates, a time-consuming process. Principals at the firms will themselves have to be approved for casinos licenses.

Still, private-equity investors have found the casino business to be a happy hunting ground lately. Los Angeles–based Colony Capital owns the Las Vegas Hilton and the Resorts Atlantic City casino, as well as dozens of other casinos in the U.S. and Europe. Colony joined private-equity investor Providence Equity Partners in a $3.8 billion purchase of Kerzner International, parent of the Atlantis Casino in the Bahamas. That deal closed on Sept. 1. Colony lost out on a bid to purchase Aztar, owner of the Tropicana brand. That company is being acquired for $2.8 billion by Kentucky hotel operator Columbia Sussex.

MIDMARKET MAJOR. Like many of the early casino brands, Harrah's was founded by an entrepreneur, in this case, William Harrah, who opened a bingo parlor in downtown Reno, Nev., in 1937. Harrah's became the first casino operator traded on the New York Stock Exchange in 1973. In 1980, Harrah's was acquired by Holiday Inns, parent of the popular hotel chain.

Harrah's has for many years tried to be the Holiday Inn of the casino business, blanketing the country with properties that are nice but not too extravagant. The company has historically targeted what the industry calls midmarket gamblers, not the high rollers sought by Las Vegas' more luxurious pleasure palaces. Through a combination of acquisitions and new construction, Harrah's now owns 36 casinos, under 10 different brands, including Bally's, Caesars, Horseshoe, and the Rio.

Unlike rivals, such as impresario Steve Wynn, Harrah's never built the kind of giant casinos that caused gamblers from around the world to flock to Las Vegas. One attempt at a high-profile casino in a major market, the Harrah's in New Orleans, backfired when the company had to agree to limit restaurant and entertainment options to appease local businesses. That casino couldn't meet its financial targets and declared bankruptcy before Harrah's acquired full ownership of it in 2002.

NOT A STREET STAR. The company began taking steps to better tie its various properties together when it hired Harvard marketing professor Loveman as chief operating officer in 1998. Two years later, Harrah's launched its highly regarded Total Rewards loyalty program, which used database mining to target various classes of gamblers, mailing them offers for free rooms, meals, and other discounts based on their level of play. "We don't fill our room with bodies, we fill them with gamblers," Loveman has said.

But while Loveman won high marks from casino peers for innovation, Harrah's midmarket focus and sprawling list of properties never generated the kind of jackpots that wowed Wall Street. Crosstown rival Las Vegas Sands Corp. (LVS), controlled by entrepreneur Sheldon Adelson, has just two casinos, the palatial Venetian in Las Vegas and the Las Vegas Sands on the Chinese island of Macau (see BusinessWeek.com, 10/7/02, "Macau: Family-Style Casinos for Sin City?"). Yet the Las Vegas Sands sports a stock market valuation of $24 billion—twice that of Harrah's before the buyout offer was announced.

Prior to the Oct. 2 offer, Harrah's stock was down 7% for the year. Competitors Las Vegas Sands, Wynn Resorts (WYNN), and MGM Mirage (MGM), were up 72%, 23%, and 8.8%, respectively, at market close on Sept. 29.

OTHER POTENTIAL TARGETS. Vegas sizzle has become increasingly important as the gambling business expands overseas. Harrah's missed out on winning licenses in Macau, where Wynn just announced that his new casino there had done $900 million worth of business in its first 13 days (see BusinessWeek.com, 6/8/06, "Vegas vs. Macau: Who Will Win?"). A proposal from Adelson's Las Vegas Sands beat out one from Harrah's earlier this year in the potentially lucrative new market of Singapore. Harrah's proposal included a family-friendly attraction designed with Titantic director James Cameron. The Singapore officials preferred Adelson's focus on up-market gamblers and conventioneers.

Loveman, who acquired the upscale Caesars brand in a $9.4 billion merger in 2004, had promised to extend Harrah's reach by opening new higher-end properties and freshening up older ones such as the Harrah's and Bally's casinos on the Vegas Strip. But a casino megaproject that tied many of the properties together, which was expected to be announced in Las Vegas this summer, was delayed. And the new international projects the company did announce in Spain, the Bahamas, and Slovenia didn't generate the same excitement as the fast-growing Asian and high-profile Vegas markets.

Analysts say the Harrah's news could make other casino operators targets, especially the smaller ones that may have a difficult time adding new properties in what's become an oversaturated U.S. market. These include Boyd Gaming (BYD), Isle of Capri Casinos (ISLE), and Pinnacle Entertainment (PNK). Gambling is a tough business, and right now the private-equity firms have a hot hand.


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