Wall Street puzzles
over Harrah’s future

Dec 25, 2006 3:40 AM

What’s next, a "For Sale" sign on the Rio Hotel/Casino?

Or a buyout bid for Boyd Gaming or Ameristar Casinos or Penn National Gaming?

Or, a postponement of further development of Harrah’s properties on the Las Vegas Strip?

These were some of the questions being asked by Wall Street analysts in the wake of the decision by Harrah’s Entertainment Inc. (HET) to accept the $17.1 billion buyout proposal made by the private-equity partnership of Apollo Management Group and Texas Pacific Group last week.

The initial offer to take the company private was for $81 per share and was made on Oct. 2. A special committee of Harrah’s directors reportedly spent two and one-half months evaluating the bid before finally accepting the sweetened offer of $90 per share.

The existence of a monumental amount of cash in the hands of private equity investors and the failure of Wall Street to properly value gaming companies suggests to analysts that more takeover bids are in the offing.

And the amount of debt that will burden Harrah’s after the buyout — a process that is expected to take at least a year — has analysts worried that the company will have to sell off such properties as the Rio in Las Vegas and possibly one or two other casinos in Atlantic City that Harrah’s would consider "non-core" in order to generate cash to reduce debt. Currently, according to the Associated Press, the company has debt of $10.7 billion. That will rise to $21 billion after the takeover.

Standard & Poor’s Ratings Services on Wednesday lowered its ratings on Harrah’s to "BB" from "BB+" to reflect the expected higher debt load. The Service also left the company on its credit watch for a possible further downgrade.

In a filing with the Securities and Exchange Commission, Harrah’s noted that it would incur a penalty of $500 million if it dropped the Apollo/Texas Pacific bid for another suitor. As for the buyers, they would have to pay Harrah’s $500 million if they fail to obtain financing for the deal and $250 million if they are unable to get regulatory approval.

Harrah’s operates in 13 different jurisdictions in the U.S. and in several foreign countries. The buyers would have to receive regulatory approvals from each of these before the deal can be consummated.