GCB ok’s Harrah’s buyout

Dec 11, 2007 5:57 AM

Last week, Harrah’s Entertainment received some good and bad news, each potentially worth billions of dollars to the Las Vegas-based gaming giant.

First the good news: Nevada regulators gave preliminary approval to a $17.7 billion purchase of Harrah’s by private equity buyers Apollo Management and Texas Pacific Group, thus setting the stage for the world’s largest casino buyout ever.

The state Gaming Control Board’s unanimous vote for the deal, already approved by Harrah’s shareholders and by several other states in which Harrah’s operates, now goes to the board’s parent Nevada Gaming Commission, which will take final action next Thursday.

Now the bad news: A federal court rejected Harrah’s motion to dismiss a $3 billion tribal court judgment originally handed down by the St. Regis Mohawk Tribal Court on behalf of the Catskill Litigation Trust.

The original judgment was lodged for $1.787 billion in 2001 against Caesars Entertainment Corporation, which was acquired by Harrah’s in June 2005. Last July the tribal court added about $1 billion to the judgment for accrued interest.

It is unclear, legal observers maintain, whether Harrah’s will be required to honor the tribal court award. Moreover, Harrah’s attorneys have said the legal issues were settled before their acquisition of Caesars properties.

Meanwhile, back in Nevada, Control Board members backed the going-private deal after being assured by the buyers that they intend to continue pumping funds into Harrah’s and that the investors they represent — typically private and public pension funds, endowments and institutions — are top-notch.

"From the standpoint of regulatory control, it probably represents the cleanest money that you could get into the casino industry," attorney Frank Schreck said in outlining terms of the Apollo-TPG venture.

"We intend to be investing in Harrah’s for a very long period of time," said Apollo executive Eric Press as he and TPG executive Kelvin Davis told Control Board members they will continue various expansion plans that Harrah’s has had in the works.

Gary Loveman, chief executive of Harrah’s, will stay on in that role. Loveman, in line for more than $90 million in stock options and other rights under terms of the buyout, said the deal will enhance Harrah’s ability to expand and improve its financial strength.

Stockholders are getting $90 a share and the company gets $6 billion in new equity. Its debt load increases to $25 billion but Control Board Chairman Dennis Neilander said he’s not concerned about the leverage increase given Harrah’s stable management and the prudent manner in which Apollo and TPG have operated.

Apollo and TPG approached Harrah’s separately in August 2006 about taking the company private before teaming up later and offering $81 a share. A year ago, as other companies joined in the bidding, Harrah’s accepted the $90-a-share offer and the regulatory review process began.

Regarding the tribal court award, if Harrah’s doesn’t win its court battle, the $3 billion would be a significant drain on the company’s worth.

In August 2007, Harrah’s filed a motion to dismiss the complaint in the enforcement action, principally claiming that the Trustees had no standing to enforce the March 2001 judgment and that a prior federal lawsuit seeking to enforce the same judgment against Caesars had been settled.

Harrah’s initially maintained in its public disclosures that: "Prior to our acquisition of Caesars in June 2005, each of the above matters was settled, pending final court approval and execution of documents and mutual releases," but in March 2007 amended this disclosure to state that: "Prior to our acquisition of Caesars in June 2005, it was believed that this matter was settled pending execution of final documents and mutual releases. However, these documents were never executed."

In denying Harrah’s motion to dismiss the complaint, the court did not preclude the issue of standing or settlement to enforce the judgment from being raised in a new application.