TPG, Apollo Said to Overvalue Harrah's Stake Before Failed Public Offering
Harrah’s Entertainment Inc., the world’s biggest casino operator, canceled an initial public offering last week because potential investors valued the company as much as $1 billion below its private-equity owners’ appraisals, two people with knowledge of the failed IPO said.
Leon Black’s Apollo Global Management LLC and David Bonderman’s TPG Capital, the private-equity firms that took Harrah’s private in 2008, were told by their IPO advisers that potential investors valued the Las Vegas-based company at $10 a share, or about $3.37 billion, according to the people, who asked not to be named because the talks were private. In September Apollo valued Harrah’s equity at about $3.83 billion and TPG pegged it at about $4.36 billion.
Apollo and TPG each rely on their own internal appraisals when calculating their funds’ performance for current and prospective investors. The higher the marks on each individual investment, the better the fund’s overall results. The IPO for Harrah’s was one of the first large buyouts with multiple owners to come to market under accounting rules that went into effect in 2007 requiring private-equity companies to gauge the “fair value” of holdings that aren’t trading publicly.
“There haven’t been many private equity-backed IPOs since the new accounting rules went into effect,” said Steven Kaplan, a professor at the University of Chicago Booth School Of Business. “It’s too early to say whether this type of disparity between public and private marks will become more common.”
Apollo and TPG’s IPO advisers at Credit Suisse Group AG and Citigroup Inc. received offers for no more than $10 a share for the casino company, the people familiar with the talks said. Harrah’s planned to offer 31.3 million shares for $15 to $17 each, to generate as much as $531 million, according to public filings. The company cited “market conditions” in pulling the IPO.
Apollo, based in New York, marked a 19 percent stake in Harrah’s at about $728 million at the end of September, implying that the equity value was $3.83 billion, or about $460 million more than the company’s valuation had it sold shares in the offering at $10 each, according to public filings and a letter to investors from Apollo. It was also a 12 percent decrease from Apollo’s mark in June, which indicated that Harrah’s equity was worth $4.36 billion.
Harrah’s would have had an equity value of $3.37 billion if the IPO priced at $10 per share, based on the 336.6 million shares that its filings say would have been outstanding.
An independent consulting service reviews Apollo’s valuation methods, according to the company’s filings with the Securities and Exchange Commission. The estimated values may “differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material,” according to the filing.
Private-equity firms generally update valuations on a quarterly basis and will send investors revised figures through the end of December.
Fort Worth, Texas-based TPG, which holds a similar stake in Harrah’s as Apollo, left its equity valuation for Harrah’s unchanged at $4.36 billion through June and September, according to a person briefed on TPG’s valuations. Blicksilver, TPG’s spokesman, declined to comment on the figures.
“Despite the healthy degree of skepticism over managers’ marks, investors rely on those numbers for their own books and balances,” said Jean-Marc Cuvilly, managing partner at Triago SA, which helps firms raise money and sells interest in existing buyout pools. “Many public pensions don’t have the resources or the information to do their own analysis.”
Private-equity firms pool money from investors and borrow money to finance takeovers with the intention of divesting the companies later for a profit. Those profits typically are realized through sales to corporations or another investor, or by selling shares to the public.
Harrah’s failed to sell its shares even as the U.S. IPO market recorded its biggest week of the year, buoyed by a 16 percent gain in the Standard & Poor’s 500 Index since the end of June. Buyout firms sold shares in a dozen of their companies, and 10 traded above their IPO prices.
For most of private equity’s 35-year history, buyout firms typically valued investments at the cost of acquisition until they sold them, usually years later. The Financial Accounting Standards Board’s Statement No. 157, which went into effect at the end of 2007, required the firms to gauge the fair value of holdings that aren’t traded on a quarterly basis. Most firms use a blend of public comparisons and discounted cash-flow analysis to value their holdings, said Tom Carrier, who oversees private- equity investments at Offit Capital in New York.
“Mark-to-market rules don’t necessarily require private- equity firms to rely solely on comparable public company multiples for their valuations,” Carrier said.
Harrah’s had more debt relative to cash flow than any private equity-backed company that sold shares this year except one: Noranda Aluminum Holding Corp., according to data compiled by Bloomberg.
Harrah’s was the first private equity-backed company to postpone or withdraw an offering after setting a price range since Americold Realty Trust, owned by billionaire Ron Burkle’s Yucaipa Cos., shelved its deal in May, data compiled by Bloomberg and Greenwich, Connecticut-based Renaissance Capital LLC showed.
John Paulson, the hedge-fund manager who made $15 billion in 2007 betting on the decline in subprime mortgages, won the right to be the first equity holder to register and possibly sell his Harrah’s stock as part of his hedge fund’s swap of debt for equity with the casino company.
Harrah’s filed an amended registration to reflect the potential sale of Paulson’s shares. Paulson and his affiliates may sell as much as 7.1 million shares, or 9.9 percent of Harrah’s shares outstanding, according to the filing.