Las Vegas Sun

August 1, 2014

Harrah’s buys Rio hotel-casino

Harrah's Entertainment Inc. said today it has agreed to buy Rio Hotel & Casino Inc. for about $880 million in stock and assumed debt.

The merger gives Harrah's an upscale all-suites Las Vegas property at Flamingo Road and Valley View Boulevard with a highly popular brand name, as well as a bigger stake in a new airline that will help transport Harrah's customers between its 20 casinos around the country.

More than half of Rio's customers are from Las Vegas and the Los Angeles area, a Harrah's executive noted; while Harrah's customers tend to come from the East Coast, the Midwest and Northern California.

The Rio will retain its name, giving Harrah's a high-end brand that could be expanded to other jurisdictions such as Atlantic City, where Harrah's owns a resort using the Harrah's name and a successful mid-range Showboat; and the Mississippi Gulf Coast, the nation's third-largest gaming market.

Harrah's closed its acquisition of Showboat June 30 and, in a filing with the Securities & Exchange Commission Friday said it may "pursue additional strategic acquisitions" as gaming-industry consolidation continues.

The deal calls for an even swap of one Harrah's share for each of the 24.8 million outstanding Rio common shares, plus assumption of about $302 million in Rio debt.

Harrah's stock, which closed at 20 1/8 Friday, slipped to 20, down 1/8, in mid-morning trading today.

Rio rose to 19 3/8 on heavy volume, up from Friday's close of 18 7/8 and above the 52-week low of 16 1/2 hit just last Wednesday.

"I think it's a great merger -- a natural -- involving two of the most progressive companies in gaming," said Dave Ehlers, chairman of Las Vegas Investment Advisors Inc.

"Harrah's got a very good property at a very good price. They got a bigger interest in an airline that could re-arrange the landscape of Las Vegas.

"It's a great merger for Rio because it spreads their investors' assets throughout the country rather than concentrating them in Las Vegas, which faces concerns about too many hotel rooms," said Andrew Zarnett of Ladenburg Thalmann & Co.

"It's also better than selling to a real estate investment trust, because Harrah's is an experienced gaming operator with strong management, reduced borrowing costs and lower operating costs.

"It gives Harrah's a more upscale property in Las Vegas and more entertainment options there for its best customers," Zarnett said.

"For Harrah's, it's a brilliant fit," Salomon Smith Barney analyst Bruce Turner told the Bloomberg News Service.

"What Harrah's lacked in their wide-ranging portfolio was a nationally acclaimed resort property in Las Vegas. They had a good property, but not one they could target toward their premium."

"From our perspective, we couldn't be more pleased with Rio becoming part of the Harrah's group of properties," said Mike Conway, chairman of National Airlines Inc.

Harrah's and Rio each invested $15 million in the new air carrier, which is scheduled to begin long-haul, low-fare service non-stop service to Las Vegas next spring. Together, they'll have four directors on National's 11-member board.

Memphis-based Harrah's said the transaction would boost the combined entity's 1999 revenues to an estimated $2.9 million, generate about $740 million of cash flow and immediately increase per-share earnings.

"Rio is a Las Vegas destination gem and, by all measures, one of the highest quality and best managed companies in our business," Harrah's Chairman Phil Satre said.

"We see an unprecedented opportunity to introduce Harrah's loyal customers to the Rio's resort-style property, as well as introduce Rio customers to Harrah's Entertainment's 19 properties around the country," he said.

Rio will add 1.3 million customers to Harrah's 8 million-customer database, which is the focal point of the company's highly successful Total Gold rewards program.

Rio Chairman Anthony Marnell will become vice chairman of Harrah's, and Rio President James Barrett will retain his position at the off-Strip property.

Marnell said the two will vote their combined 22 percent of Rio's outstanding common shares in favor of the transaction.

Rio has more than 2,500 suites, 120,000 square feet of gaming space with 2,400 slot machines and 100 table games, and owns the Rio Secco golf course. It has been rated the "Best Hotel Value in the World" by Travel & Leisure Magazine and is the only casino resort to receive a "Five-Star Diamond Award" from the American Academy of Hospitality Services.

The transaction would result in a company with three casino brands -- Harrah's, Rio and Showboat -- 20 gaming properties in 15 geographic locations and 35,000 employees.

Harrah's will have 126 million shares outstanding, up from the current 101 million, if the transaction is approved by shareholders of both companies.

Harrah's said it expects to save $7 million annually through reduced overhead within two years and to refinance Rio's debt at a lower interest rate.

Two bond rating agencies -- Moody's and Standard & Poor's -- said today they might upgrade Rio debt.

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