Harrah’s, Caesars in talks to sell casinos

By Liz Benston

Tuesday, Aug. 31, 2004 | 10:33 a.m.

Harrah's Entertainment Inc. and Caesars Entertainment Inc. have signed an exclusivity agreement with an affiliate of Colony Capital LLC that allows Colony to negotiate the purchase of four casinos in advance of the pending merger of Harrah's and Caesars, the companies said today.

In a joint statement, the companies said they had reached an agreement that "places certain restrictions on Harrah's and Caesars for a limited period of time regarding negotiations with other parties with respect to the sale of the properties."

The potential sale would include Harrah's-owned properties in Tunica, Miss., and East Chicago, Ind., as well as Caesars' Atlantic City Hilton and Bally's riverboat casino in Tunica, the companies said.

The purchase isn't final, they said.

"Such discussions are in a preliminary stage and there can be no assurance that an agreement will be reached," the statement read.

Spokesmen for Harrah's, Caesars and Colony Capital declined further comment.

Analysts said they weren't surprised by the news and expected those casinos to be sold. In announcing the merger with Caesars, Harrah's Chief Executive Gary Loveman had said the company -- which would own three casinos once it acquires Caesars -- would sell one of its casinos in Indiana because of a state law preventing companies from owning more than two casinos in that market. He also had said the company would likely sell casinos in Tunica, where the combined company would own five casinos and control a majority share of the market. Loveman also speculated about the possibility of selling casinos in Lake Tahoe, where the combined company would own four properties.

While Loveman had said the company wouldn't necessarily sell any properties in Atlantic City, analysts have speculated that the combined entity -- which would own five of the city's 12 casinos -- would be pressured by regulators to sell casinos there as well.

UBS Warburg analyst Robin Farley said the sale would be positive for Caesars because it increases the chances that the pending acquisition will pass muster from antitrust regulators who are now scrutinizing the deal.

"We believe that (Harrah's and Caesars) will be required to divest a number of properties, including these four, in order to get regulatory approval," Farley wrote in a research note to investors Monday. "We also believe that (the companies) may be required to sell a property in Tahoe and one in New Orleans."

Steve Newborn, former head of merger enforcement at the Federal Trade Commission, said it would be too early for the company to be selling these particular properties to satisfy any particular requirement from federal regulators.

"Unless this is done pursuant to an agreement with the FTC, (the potential sale) may not satisfy their concerns," said Newborn, a Washington, D.C.-based antitrust attorney. "Lots of companies decide they are going to fix this themselves before going through the regulatory process. But the FTC has firm opinions on how much must be divested."

In a research note today, CIBC World Markets analyst William Schmitt said the assets slated for sale are considered "non-core" and said the properties are located in the three markets in which the combined entity "would have been heavily concentrated, potentially leading to difficulties in gaining regulatory approval for the proposed merger."

Harrah's executives have stated that a primary goal of the merger with Caesars is to increase the company's presence on the Las Vegas Strip.

Under the terms of the agreement, Colony Capital would have about three weeks to close the deal, Schmitt said.

Analysts said the offer, valued at about $1.3 billion, is equal to more than eight times the properties' annual cash flow. Analysts said the offer appeared more than expected for the four casinos given that they aren't top-tier properties.

Farley said the offer could increase the estimated book value of the combined companies and said she had projected the properties would fetch an offer of about six times their estimated cash flow in 2005.

Los Angeles-based Colony Capital is a private equity firm that financed this year's $280 million purchase of the Las Vegas Hilton from Caesars Entertainment. Colony, which formerly owned the Harvey's casino in South Lake Tahoe, also owns Resorts International in Atlantic City and is a partner in Accor Casinos in Europe. The company focuses on real estate and has investors that include state and private company pension funds.

Fulcrum Global Partners analyst Joe Greff said Colony's interest is a sign that private investment groups are hot on the casino industry.

"It appears that private equity buyers are valuing gaming assets, which are strong free cash flow generators, at higher multiples than they currently are afforded in the public markets, especially considering the lower-tier nature of the target properties," Greff wrote in a research note today.

The emergence of private buyers willing to pay premiums for casinos "may crowd out smaller operators" like Argosy Gaming Co. that are looking to make acquisitions, he said.