Harrah’s buying good cash producers in Harveys

David Strow

Wednesday, April 25, 2001 | 10:47 a.m.

Harrah's Entertainment Inc. of Las Vegas said Tuesday it will acquire Harveys Casino Resorts of Lake Tahoe for $625 million, its fourth acquisition in as many years.

The deal will give Harrah's its third Lake Tahoe resort, increasing its market share in Northern Nevada. But it will also put Harrah's into two new markets -- suburban Omaha, Neb., and the mountains of Colorado.

"Clearly, these are properties that have huge potential for us simply by reducing costs and implementing Total Rewards (Harrah's customer loyalty program)," said Chuck Atwood, Harrah's chief financial officer. "The synergies are really where all the gold is."

Harveys generated $110 million in cash flow over the 12 months ending Feb. 28; Harrah's expects to generate up to $25 million in annual savings from the buyout, and said the deal should be immediately accretive to earnings.

Harrah's plans to finance the cash deal entirely with debt. Harrah's will also take on a $50 million obligation that is not carried on Harveys' balance sheet. The company will be required to pay the $50 million if Council Bluffs, Iowa, voters approve the continued legalization of gaming in November 2002. Council Bluffs is located across the Missouri River from Omaha, and is home to two Harveys casinos.

The deal was generally applauded by analysts, who saw it as an attractively valued deal that gave Harrah's a key new Midwestern market.

"I believe it's a good deal, because it expands their presence in important Midwestern markets, in this case Omaha, which is a 1.7 million-person market," said Harry Curtis, gaming analyst with Robertson Stephens. "It adds 600,000 members to their Total Rewards program, and some of those customers will inevitably make their way to Las Vegas."

David Anders, gaming analyst with Merrill Lynch, noted the company's success in integrating riverboats into its casino network in the past.

"Strategically, this acquisition makes enormous sense, as the Harveys assets should benefit from Harrah's Total Rewards program," Anders wrote in a research note.

Still, Harrah's fell 93 cents to $35.83 this morning. This decline, however, came on the heels of a strong day Tuesday that saw Harrah's rise 4 percent and close near its 52-week high. The Harveys deal was announced after Tuesday's market close.

Harveys, a privately held company, is controlled by Colony Capital of Los Angeles, which acquired the company in February 1999 for $405 million.

"The pricing makes this a home-run transaction," said Marzena Jablonska, spokeswoman for Colony. "Colony has experienced tremendous success with growing cash flow at the properties, and is excited to monetize that success and allow a much larger strategic operator to take the assets to another level."

Harrah's expects the deal to close during the third quarter, assuming regulatory approvals can be obtained. Once complete, Harrah's would have 25 casinos in 12 states.

"Our strategy has at its core creating customer loyalty with more customers in more places, then distributing that loyalty over multiple locations," said Harrah's Chairman and Chief Executive Phil Satre.

Key to that strategy is entering new markets, particularly ones with little chance of growing competition.

"People want to make it sound like there's a wide variety of acquisitions that fit that template, but I beg to differ," Satre said. "There are only a handful of acquisitions today that would fit that description."

Harveys owns and operates Harveys Hotel and Casino in Lake Tahoe, a 740-room resort with an 82,000-square-foot casino, 2,000 slot machines and 96 table games. It is located literally across the street from Harrah's Lake Tahoe. Management and operations will be merged with Harrah's Lake Tahoe, but Harrah's officials say they're likely to keep the historic Harveys name there because of its strong brand recognition in that market. This property generated $42 million in cash flow over the last 12 months.

The Harveys name will likely be replaced by the Harrah's brand at Harveys' riverboat casino in Council Bluffs, Iowa, located directly across the Missouri River from Omaha. That property has 250 hotel rooms and a 28,000-square-foot casino with 1,220 slots and 45 table games. It generated $33 million in cash flow in the past 12 months.

Also located in Council Bluffs is Bluffs Run, a combination greyhound racetrack and 30,000-square-foot casino with 1,500 slot machines. The property generated $37 million in cash flow over the past 12 months; Harrah's officials said the property will likely keep the Bluffs Run name, but that the Harrah's brand could be associated with it.

The final property in the portfolio is Harveys Wagon Wheel, located 35 miles west of Denver in Central City, Colo., with 118 hotel rooms and a 40,000-square-foot casino with 1,000 slots. This casino has not performed well in the face of competition from nearby Black Hawk casinos, and generated just $6 million in cash flow over the last 12 months. Harrah's officials will not rebrand this property, and would not rule out reselling the Wagon Wheel at a later date.

Overall, the Harveys portfolio will increase Harrah's hotel room base by 10 percent, to more than 13,000. It will increase the company's total casino square footage and number of slot machines by 15 percent.

Harveys would be Harrah's fourth acquisition in four years. From 1998 to 2000, Harrah's spent a combined $2.4 billion acquiring three companies -- Players International, Showboat and Rio Properties.

While the Players and Showboat buyouts have generally been viewed as successful, the Rio purchase has proved troublesome, as Harrah's has had difficulty getting the kind of cash flow from the Las Vegas property that would justify its $825 million purchase price.

"It's fair to say we've learned a lesson, that in cases where we failed to move forcefully to rebrand and integrate (properties), we've suffered accordingly," said Harrah's President Gary Loveman. "In the case of Showboat Atlantic City and Rio, it has been costly indeed. In the case of Harveys we will move very quickly ... to bring Total Rewards into place in these properties quickly."

Total Rewards is the unified slot club card that customers can use at any Harrah's property across the nation. Harrah's credits the system with driving cross-market visitation across its national chain of casinos, as well as healthy same-store sales growth.

"The company has learned much from its three recent acquisitions," Curtis said. "Some have been more successful than others, particularly the most recent success with the Players transaction (closed in March 2000). I think that the acquisition of Harveys is more like the Players transaction than either the Rio or Showboat."

The deal does not spell the end of Colony's budding interest in the gaming industry. Not included in the Harveys deal is the $140 million purchase of Atlantic City's Resorts Casino Hotel from Sun International, a deal set to close today. More deals could yet be in the works.

"Our commitment to opportunities in the (gaming) sector remains undiminished," said Thomas Barrack Jr., chairman of Colony, in a statement.

Jablonska said that could include a Las Vegas acquisition, though the company has no current plans to make such a deal.

The acquisition announcement comes three months after Harveys' deal to acquire Pinnacle Entertainment Inc. of California fell through. Harveys was to have paid $1.3 billion for Pinnacle, an operator of casinos in Mississippi, Louisiana, Indiana and Nevada, but that deal fell through after Harveys had difficulty finding financing to complete the transaction.

"With Resorts, you can fix it up and gain market share," said Jeffrey Logsdon, gaming analyst with Gerard Klauer Mattison. "Tahoe is not a growth market, and you've probably maxed out what you can do on the riverboat side. So you monetize your gains, and you can use the capital to fix up the Resorts property."