Harrah’s to suffer a financial blow from investment

David Strow

Thursday, Dec. 7, 2000 | 11:25 a.m.

Harrah's Entertainment Inc., owner of nearly half of the stock of privately held National Airlines, will take a financial blow from National's bankruptcy, the Las Vegas-based casino giant said today.

Harrah's stock fell $1.31 this morning to $27.13 on the news, a decline of nearly 5 percent.

Harrah's, 48 percent owner of National, has pumped about $57.6 million into the airline since its inception, Harrah's said in a filing this morning with the Securities and Exchange Commission. The company will absorb write-offs during this quarter as a result of the bankruptcy, but Harrah's said it was "unable at this time to estimate the extent of any such write-offs."

What the report doesn't state is how much Harrah's had invested in recent weeks in National, when the company's financial struggles apparently worsened. Harrah's had an investment balance of $13.3 million in National Airlines as of Sept. 30, and holds pre-paid tickets worth $2.7 million.

But the company also said it had notes receivable from National Airlines for $17 million, plus letters of credit totaling $24.6 million. This $41.6 million investment included funds advanced after Sept. 30, though Harrah's didn't say how much.

Gary Thompson, spokesman for Harrah's, defended the investment -- though he said Harrah's will not invest significant amounts of additional capital without similar investments by other gaming operators.

"We believe it was a worthwhile investment, not only for Harrah's (Las Vegas) and the Rio, but for Las Vegas," Thompson said. "National generated $1.5 billion worth of business in this community, and National brought in more than half of the increase in passenger traffic through McCarran (International Airport)."

Analysts are concerned the potential loss of those flights could spill over to other gaming operators.

In a report issued this morning, Robertson Stephens gaming analyst Harry Curtis branded the bankruptcy a "psychological negative for Harrah's and Las Vegas." Though Curtis noted that National will continue operating in the short-term, he said he believes the carrier will shut down next year.

"The National bankruptcy does have negative demand implications for the market, in our view," Curtis wrote. "If demand trends were robust, then the airline would have had an easier time attracting capital necessary to continue operating. The negative for other operators, including MGM (MIRAGE), Park Place Entertainment and Mandalay Resort Group is fewer airline options for key feeder cities such as New York and Los Angeles."

If Harrah's takes a full write-off of its National investment, company earnings would be lowered by 31 cents per share, Curtis estimated.

Robin Farley, gaming analyst with UBS Warburg, also expressed concern over the bankruptcy and its potential impact on Las Vegas.

"(National) was the first airline to make Las Vegas its hub and its growth was to be based on the increase in demand for flights to Vegas from the increase in visitors to all the new resorts opening there," Farley wrote. "The company cites higher fuel costs as the reason for its bankruptcy filing, but we believe the news could reflect negatively on the gaming operators today because of inferences about demand for air service to the Las Vegas market."

Those concerns appeared to be impacting other gaming operators to some extent this morning. By midday, MGM MIRAGE had taken the brunt of the selling, dropping $1.31 to $29.44. Mandalay Resort Group was off 13 cents to $20.56, while Park Place declined 19 cents to $13.38.