Harrah’s buyout of Harveys clears federal antitrust review

David Strow

Monday, July 23, 2001 | 11:18 a.m.

Harrah's Entertainment Inc.'s $675 million buyout of Harveys Casino Resorts cleared a key hurdle Friday, when the federal government said it wouldn't try to block the deal on antitrust grounds.

Harrah's plans to acquire the Lake Tahoe casino operator were delayed last month, when the Federal Trade Commission extended a "waiting period" required by federal law by 30 days and asked for more information. With the FTC's review of the deal at an end, Harrah's said it expects the deal to close sometime in the next three months.

The FTC's request for additional information centered on the Lake Tahoe market, where Harrah's already owns two properties. Acquiring Harveys Resort & Casino in Lake Tahoe will give Harrah's three of the area's six major casinos, more than half of the market's 2,400 slot machines, and more than 60 percent of its 5,700 slot machines.

Had it ruled that Harrah's controlled too much of that market, the FTC could have blocked the deal completely, or forced Harrah's to sell off some of its Lake Tahoe portfolio. Ultimately, the FTC chose to do neither.

"What they (the FTC) were looking at was whether Tahoe was a distinct market, and whether market concentration in the Harveys acquisition would raise antitrust issues," said Harrah's spokesman Gary Thompson. "We supplied them with data indicating South Lake Tahoe was not a distinct market, but part of the Northern Nevada/California market.

"They didn't share their rationale with us, but we are assuming, by virtue of the early termination, that they determined Tahoe was not a distinct market."

FTC spokesman Mitchell Katz confirmed that the commission had terminated the waiting period, but declined to discuss the reasons behind this decision.

Few gaming industry observers were surprised the FTC didn't take action. The commission didn't move against far larger mergers, such as Park Place Entertainment Corp.'s buyout of Caesars World Inc. or MGM Grand Inc.'s takeover of Mirage Resorts Inc.

"I think it would have to be something very large, where they (the FTC) truly thought there was a monopoly being created in the world of gaming," said Andrew Zarnett, gaming analyst with Deutsche Banc Alex. Brown. "Lake Tahoe doesn't fit into that. It would have to be a very big market (for the FTC to intervene), like Las Vegas. If Park Place bought Mandalay (Resort Group), that would force the FTC to do a lot more analysis, and would probably be a deal-breaker."

The next step for the deal is the approval of Nevada gaming regulators. Dennis Neilander, chairman of the Nevada Gaming Control Board, has indicated the board will also closely examine the market concentration issue.

But again, intervention would go against recent actions. Over the past year, the control board permitted Station Casinos Inc. to increase its market share in Las Vegas from four to seven casinos, despite some concerns that the company was gaining too large a share of the Las Vegas locals market. Ultimately, however, the board decided in that case that the Las Vegas locals market couldn't be considered separately from the rest of the city's casino industry.

"We're not going to presume what action the control board will take," Thompson said.

But even if the control board allows the deal to go through, is it still an attractive one? Dennis Forst, gaming analyst with McDonald Investments, is starting to to have his doubts.

Forst pointed to Harveys earnings for the quarter ended May 31, released last week. Harveys reported that its revenues fell 2 percent to $112.3 million -- and that its cash flow was down 13 percent to $26.2 million. Cash flow at Harveys Lake Tahoe was down 32 percent to $7 million.

"That's not pretty," Forst said. "The Harveys numbers for the May quarter were well below what I or anyone else expected. It's still a great fit, but I think there's some question about how good a deal it is right now. I'm curious about whether the Harrah's people have thought about adjusting the price."