Harrah’s deal could set precedent

Oct 10, 2006 3:51 AM

The $15 billion offer for Harrah’s Entertainment by two private equity funds could lead to "significant changes" in how the biggest players in the gaming industry are financed.

There could be a lot more private money, assuming this offer is finalized. Besides, the funds hoping to acquire Harrah’s, and other funds like them, have more to offer than even the biggest banks.

That’s the view of a senior executive in one of the big gaming companies. He eagerly scanned the first news reports of the offer and opined, "I can guarantee you they are almost certainly dancing on desk tops over there at Harrah’s."

Why?

"Because a deal like this is all about management — management that is guaranteed to stay in place," he said.

Moreover, everyone gets paid for his or her stock, and management, he continued, usually ends up with a piece of the company.

A very sweet deal indeed, his smile seemed to say.

Private ownership has an appreciation for what casino companies do best — generate cash flow. Ownership by an equity fund would "put an emphasis on creating value" rather than the kind of growth numbers expected by Wall Street from which it is sometimes difficult to squeeze profits.

There’s a lot of private equity money looking for a place to land in the gaming business. The two funds seeking Harrah’s, Apollo Management and the Texas Pacific Group, collectively have more than $30 billion in assets.

"The problem until now," this executive explained, "was in getting over the mountain created by licensing requirements. It’s apparent that the people responsible for putting this offer together think they’ve found the way to do that."

Nevada regulators have developed the licensing procedures that allow the representatives of these funds to sit in company boardrooms as decision-making owners. Two different funds have jumped through all the necessary hoops and now have minority ownership stakes in both the Las Vegas Hilton and Cannery Resorts.

But these are minority interests. It remains to be seen how regulators will respond to the notion of a private equity fund owning all of a company the size of Harrah’s.

Gaming Control Board member Bobby Siller opposed the licensing of the Goldman Sachs-sponsored Whitehall Funds at the Las Vegas Hilton, arguing that the people licensed by a majority of the Board and the Gaming Commission were merely Whitehall employees. Such a situation could, he suggested, lead to influence issues that would not be good for the state,

Whose best interests might these individuals be monitoring, he asked in so many words — the state of Nevada or Goldman Sachs?

Siller subsequently approved Oaktree Capital’s investment in Cannery because all of the Oaktree principals were in front of the Board. Colony Capital was previously approved as the owner of Harvey’s in the late 1990s, but it was controlled by one man, Tom Barrick. No problem there.

A take-over of a company the size of Harrah’s by a sprawling private fund might persuade some regulators to have second thoughts.

Did anyone anticipate that the interest of private funds in full ownership might evolve so quickly?

"I don’t believe it did," said a source familiar with the thinking of Nevada gaming regulators.

It’s another of the issues that bears watching.

Harrah’s could face a variety of licensing issues since it operates in so many different U.S. jurisdictions, but the great bulk of its U.S. assets are in Nevada, New Jersey and Mississippi. This could mean a sell-off of some assets, a possibility that would be closely monitored by small casino companies looking for growth opportunities.

CORRECTION

Whoops, I goofed . . . Mori Eskandani’s production company specializing in televised poker shows was misidentified in the last issue. The proper name is Poker PROductions.