Harrah's: A High-Stakes Buyout

Shares of the casino outfit shot higher on news of a private-equity takeover bid

After a multi-year run of mergers in the gaming industry, private equity groups now want to get in on the action. On Oct. 2, Harrah's Entertainment (HET) said it received a proposal from Apollo Management and Texas Pacific Group to acquire all of Harrah's outstanding common stock for $81 per share in cash, or about $15 billion. A special committee of Harrah's board of directors has been established to review the proposal.

The shares spiked sharply on Monday to trade near the proposed acquisition price.

Harrah's operates casino hotels in the traditional U.S. gaming markets of Reno, Lake Tahoe, Las Vegas and Laughlin (Nev.), and Atlantic City. It also operates riverboat and Indian reservation casinos and the Bluegrass Downs harness racetrack in Kentucky. It significantly expanded its operations with the June, 2005, acquisition of Caesars Entertainment.

After the run-up in the stock, one Wall Street analyst told shareholders that their best move would be to "hold 'em". Standard & Poor's Equity Research analyst Thomas Graves noted that the $81 price tag was modestly below the high price that the stock reached earlier this year, and he does not expect a higher bid to emerge. Graves says he was surprised that Harrah's was a buyout target, given the large capital spending outlays he expects ahead for the company. S&P Equity assumes Harrah's "sizeable" operating cash flows helped to attract buyout interest.

Banc of America Securities analyst J. Cogan kept the firm's neutral-weight stance on casino operators. In an Oct. 2 research note, he noted the potential for additional M&A in the sector, including further private-equity bids. "We expect the Street to begin to weigh the odds of further transactions in the gaming sector, including the potential for further private-equity interest, which could keep a bid on the stocks, as well."

One negative note on the deal was sounded by Standard & Poor's Ratings Services (which operates separately from S&P Equity Research, and, like S&P Equity and BusinessWeek.com., is a unit of The McGraw-Hill Companies). The rating agency cut Harrah's long-term credit rating to BB+ -- below investment grade -- from its former perch at BBB-, citing its expectation of "a marked increase in leverage" if the deal is consummated.

"The acquisition proposal, and likely increased shareholder pressures, comes at a time when Harrah's already had limited flexibility in its leverage profile at its former rating" of BBB-, according to S&P Ratings. "If an acquisition is not consummated, we believe the company will be faced with increasing shareholder pressures for some form of leveraging transaction over the near term, given the company's stock-price appreciation since the public confirmation by Harrah's of the acquisition proposal."

Whatever the outcome, it's clear that the stakes have been raised for Harrah's and its shareholders.

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