Merger rumors flying on Strip

David Strow

Thursday, March 1, 2001 | 11:24 a.m.

One year after MGM Grand Inc. launched its $6.4 billion takeover of Mirage Resorts Inc., the gaming industry is once again buzzing with rumors of the next big takeover.

The latest rumor du jour involves Park Place Entertainment Corp. -- and the possibility it could be taken over by Harrah's Entertainment Inc. Gaming Today, citing unnamed sources, this week reported Harrah's was considering a $10 billion stock offering for Park Place.

The trend of buyouts in the gaming industry is expected to continue. But gaming analysts say they'd be stunned if a Harrah's-Park Place deal actually emerged.

"I believe that's a real long shot," said Merrill Lynch gaming analyst David Anders. "Perhaps certain select assets in the Park Place portfolio would make sense for Harrah's to own, but acquiring the company would make very little sense.

"Park of the reason acquisitions make sense for Harrah's is they can take properties and plug them into Total Rewards (Harrah's slot club program), and many time rebrand (properties) as Harrah's. I just don't know how many Park Place properties you could do that to."

"At some point, I think there would be further consolidation," said Jason Ader, gaming analyst with Bear Stearns. "I'd be surprised if a deal of that magnitude happened so quickly, given (Park Place Chief Executive) Tom Gallagher's short duration at the company. I'm not sure the timing makes sense strategically right now. This is just a rumor."

Gaming companies often crunch numbers for potential deals, and sources familiar with the matter indicate Harrah's has done that. Several months ago, Harrah's officials examined a possible marriage with Park Place, but nothing came of it, sources said.

"From a macro-perspective, it makes sense for the two companies to merge, because one (Harrah's) is dominant in the riverboat market and one is dominant in the destination market," said Andrew Zarnett, gaming analyst at Deutsche Banc Alex. Brown. "(But) there's too much of a culture difference between the two companies, and I think Park Place would want to be in the driver's seat. I don't think Harrah's would necessarily want that."

Zarnett, along with other analysts, does believe further takeovers are likely to sweep across the industry, though on a smaller level than the blockbusters of 1999 and 2000.

"It's awfully quiet in general right now," Zarnett said. "The market consolidated dramatically in 2000, leaving much fewer opportunities in 2001. A lot of companies are looking at shedding an asset, buying an asset or trading an asset."

A potential takeover target in the long-term, Zarnett said, is Station Casinos Inc. Both Park Place and MGM MIRAGE have eyed Station in the past, and Zarnett believes a MGM MIRAGE bid for Station could materialize in late 2001 or early 2002.

"I know MGM would be interested in buying that company (Station)," Zarnett said. "There's no overlap, and they (MGM MIRAGE) love the business model (of Station). They love the profile in terms of return on investment. (But) I don't think now is the time."

Ader also believes big deals down the road are likely. Potential targets include Isle of Capri Casinos Inc., Argosy Gaming Co. and Aztar Corp., Ader said; historical buyers are Harrah's, Park Place, MGM MIRAGE, Pinnacle Entertainment Inc., Penn National Gaming Inc. and Colony Capital LLC.

One company that could be a buyer or seller, Ader said, is Mandalay Resort Group.

"At some point, the big companies will come together as well," Ader said. "Consolidation is inevitable in the gaming industry, given the limited growth opportunities that exist. Returns on investment have been declining, so it makes more economic sense to buy rather than build."