Regulators OK Harrah’s takeover of Harveys

David Strow

Friday, July 27, 2001 | 10:39 a.m.

After three hours of debate, Nevada gaming regulators gave their blessings Thursday to Harrah's Entertainment Inc.'s $675 million takeover of Harveys Casino Resorts of Lake Tahoe.

The approvals of the state Gaming Control Board and the Nevada Gaming Commission, given in special sessions Thursday afternoon, were the final hurdles Las Vegas-based Harrah's faced in finishing the deal. With the approvals, it is expected the merger will close July 31.

The deal will boost Harrah's annual revenues from $3.5 billion annually to about $4 billion a year; cash flow will increase from an estimated $930 million to more than $1 billion per year.

Harveys will give Harrah's two Iowa casinos, located in the Omaha, Neb., metropolitan area, as well as a small casino in Central City, Colo. But regulators' interest focused in on the marriage between Harrah's and Harveys in Lake Tahoe.

For decades, "we've been fierce competitors, lining each other up in our gunsights," said Joe Hasson, general manager of Harrah's Lake Tahoe.

Merging those two competitors will give Harrah's a massive portion of the Lake Tahoe market. Today it receives 42 percent of gaming revenues generated by Lake Tahoe casinos -- after the deal, it will net nearly 70 percent.

The market concentration implied by such a number caught the interest of the Federal Trade Commission, which delayed the deal by 30 days to give it closer examination. Harrah's attorneys said Thursday that unexpected move came not as the result of a complaint by a competitor, but from the interest of a Seattle FTC attorney who was a regular Lake Tahoe visitor -- and wanted more information on whether the deal would be anti-competitive within that market.

Earlier this month, however, the FTC chose to let the deal go through.

Harrah's was also able to convince Nevada regulators undue market concentration wouldn't result from the deal, though it was a topic of much discussion.

Rather than focusing on simply Lake Tahoe, Harrah's officials and attorneys argued a more appropriate market was the Reno-Lake Tahoe-Carson Valley market, as visitors could easily choose between any of the three areas, and often play in multiple gaming markets. Within the expanded Northern Nevada market, Harrah's share of gaming revenues will rise from 17.3 percent to 23.4 percent; within Nevada as a whole, it will increase from 8 percent to 8.8 percent.

Regulators appeared convinced that the deal wouldn't hurt Lake Tahoe players, but there was concern about the economic impact the deal could have on area businesses that sell to Harveys -- particularly after Harrah's officials noted that they expected $16 million in annual cost savings from the merger in just the Lake Tahoe market.

"I'm concerned about the impact this will have on the local people (and businesses) who depend on Harveys and Harrah's," said board member Bobby Siller. "They don't have an alternative market. That adds to a worsening economy."

Harrah's President Gary Loveman responded that the positive economic impact would far outweigh any negatives, as Harrah's had the economic and marketing resources to draw business to Lake Tahoe. He estimated that lost contracts by local vendors in the Lake Tahoe area probably wouldn't exceed $400,000 a year.

"That market (Lake Tahoe) is just awful right now," Loveman said. "It's a market that hasn't grown in 10 years, a market that needs to generate business from the East. Our offer is by far the best bet for revitalizing the Lake Tahoe area."

As an example, Harrah's Chairman Phil Satre said the company hoped to build a convention center in Lake Tahoe.

"The only way Reno and Lake Tahoe are going to overcome the threat of Indian gaming (in California) is to have more than just casinos," Satre said.

At the end of the hearing, Siller and board Chairman Dennis Neilander enthusiastically supported the merger. Member Scott Scherer voted in favor as well, though he expressed reservations. Scherer said he was most concerned by the fact that new casinos simply couldn't be built in Lake Tahoe to compete with the Harrah's juggernaut. However, he said he was swayed by the economic benefit the merger could bring.

"But this particular transaction pushed the limits of where I'm at (Scherer's comfort level) on multiple licensing criteria," Scherer said.

By comparison, the commission's hearing was speedy. The only difficult questioning of Harrah's officials came from Commissioner Augie Gurrola, who pointed out that the company had had economic difficulties with its buyouts of Showboat Inc. and the Rio.

"What makes you think you'll be more successful with Harveys?" Gurrola said.

Satre responded that the Showboat acquisition had been quite successful, noting that the company had planned all along to sell the Showboat in Las Vegas. He also noted the company had great success with its recent acquisition of Players International.

As for the Rio, "that was a very good sale for the seller, because it came right at the time when more competition was coming in," Satre said. "We still believe the Rio is a very strong property, and has the attributes to be a success for our company, but we realize there's a lot more competition now than we anticipated coming in.

"I'm confident we have a strategy that works."

After a short discussion, the commission voted unanimously to approve the largest casino deal seen so far in 2001.

"I believe Harrah's is a strong company that will allow Lake Tahoe to continue to compete," said commission Chairman Brian Sandoval. "I believe this is in the best interest of the state of Nevada."