Casino merger approved by boards

By Liz Benston (contact)

Wednesday, July 14, 2004 | 8:11 a.m.

The boards of Harrah's Entertainment Inc. and Caesars Entertainment Inc. agreed in principle to a megadeal Wednesday night in which Harrah's would buy Caesars for about $9.48 billion, including the assumption of $4.2 billion in debt, a source close to the deal said.

The deal is expected to be announced Thursday morning.

The source said Harrah's agreed to pay about $17 per share for Caesars in stock and cash. That portion of the deal is valued at $5.28 billion.

Caesars stock jumped $2.08, or $14.9 percent, in Wednesday trading on reports of a potential deal. It closed at $16. Harrah's fell $1, or 1.9 percent, to $50.98.

Prior to approval of the deal Wednesday, analysts buzzed about the potential for growing antitrust concerns if federal regulators end up weighing in on not one but two megamergers in the gaming industry.

When MGM MIRAGE agreed to buy Mandalay Resort Group for $7.9 billion last month, some analysts speculated that the deal would still pass muster because the companies would have the greatest market concentration in Las Vegas, which competes with other tourist destinations worldwide and still has significant competition on and off the Strip.

But news that Harrah's could buy Caesars could throw a wrench in the scenario by reducing the number of potential competitors in Las Vegas, experts say. The potential Harrah's-Caesars combination would create a more geographically diverse company with casinos in more than 12 states and others abroad, raising potentially more antitrust issues in smaller, regional markets where their casinos overlap and drawing attention to the casino industry as a whole, they say.

Antitrust experts say the two potential megadeals bear some resemblance to a pair of planned mergers in the soft drink industry in the 1980s.

Shortly after Coca-Cola proposed acquiring Dr. Pepper, competitor Pepsi announced plans to buy 7-Up in a tactical move widely seen as a way to thwart the Coke merger.

The Federal Trade Commission in 1986 forestalled both mergers, arguing that they would have created too much market concentration.

A somewhat more subtle move was made by two pharmaceutical companies that each proposed mergers in the late 1980s and decided to have their two FTC cases tried in the same proceeding, said Warren Grimes, a professor of antitrust law at Southwestern University Law School in Georgetown, Texas, and a former Federal Trade Commission attorney.

"That might have saved them a bit in legal costs but I think the major reason was that they didn't want to see the other acquisition go through without one of their own," Grimes said. "They wanted all or nothing."

Representatives for both Harrah's and Caesars could not be reached for comment Wednesday.

The Federal Trade Commission would no doubt closely examine both deals individually but having two potential mergers might mean tougher scrutiny, said Steve Newborn, former head of merger enforcement at the FTC and an attorney for a global merger and antitrust firm in New York.

"It creates a lot more noise in that area in terms of people talking to the FTC or the Justice Department," Newborn said. "That might make them look closer."

Having one fewer competitor in Las Vegas also could increase market concentration in hotel rooms and casino space, he said.

But David Leonard, a former Justice Department lawyer and now a Los Angeles-based attorney, said more mergers on the horizon probably won't make a difference to regulators.

That's because it will still be difficult for federal officials to figure out market concentration data in a complex market like Las Vegas, with casino games, hotel rooms, entertainment and restaurants to take into account, he said.

Prices for consumers won't necessarily go up if the Las Vegas Strip is consolidated, Leonard said.

"The issue boils down to what consumers will have to pay once this consolidation goes through," he said. Smaller markets such as Atlantic City have fewer hotel rooms and therefore might face some price problems, however, he said.

Marc Schildkraut, a Washington, D.C.-based antitrust attorney and former assistant director of the FTC's Bureau of Competition, said the potential deals could pass muster if the agency determines that customers would simply go to competitors or other places if the companies raised prices.

Smaller markets such as Lake Tahoe, where the companies would control a greater share of hotel rooms and gambling in the region than Las Vegas, may prove more challenging for regulators, however, he said.

"There may be less room to build new establishments, the market may not be growing enough to build more establishments or there might not be as much competition between that area and other areas," Schildkraut said.

Regulators won't shy away from digging into casino records for detailed market information to help them make that decision, Newborn said.

"Everyone who comes to the FTC says their industry is different and merger guidelines shouldn't apply," he said. "But the guidelines have proven to be extraordinarily elastic to measure market concentration in every industry. Every industry has its own idiosyncracy and nobody gets a free pass from federal antitrust laws."

State regulators also are bracing for their own investigations.

State Gaming Control Board Chairman Dennis Neilander said he was surprised when he heard the news of the prospective merger but said it's not uncommon for casino companies "to go out and kick the tires" of other properties after a major deal is announced.

Neilander said the proposed MGM MIRAGE-Mandalay Resort Group deal could affect any marriage between Harrah's and Caesars because regulators would examine the existing competitive environment, which could be altered if the MGM MIRAGE-Mandalay matter is wrapped up.

But he added that a Harrah's-Caesars blending would be evaluated on its own merits based on Nevada's Regulation 3.070. That regulation addresses multiple licensing and whether proposed acquisitions would affect the market share for total numbers of slot machines, table games, gross revenue, rooms available, employees hired and total payroll.

Regulators also would examine effects on suppliers and employees, and whether the acquisition would pose problems or create a monopoly, Neilander said.

While the latest news gives them pause, some consumer advocates say tourists shouldn't worry about a future with fewer choices or higher prices.

"I think the consumer can get better service with a big company," said Bill Thompson, a public administration professor at the University of Nevada, Las Vegas. "I don't see this as a vehicle to hurt the consumer, I see it as a vehicle to help the consumer and give them a better deal."

Similarly, Wal-Mart uses pricing power to offer low prices, which ends up hurting competitors rather than customers.

"The question is whether (casinos) like the Sahara and the Riviera can find a niche in this milieu," Thompson said. "They can if the two big companies do not engage in predatory practices."

Anthony Curtis, publisher of the Las Vegas Advisor consumer newsletter, said he doesn't feel as bullish on the prospect of two megamergers as he did with just one on the table. Still, the idea that Harrah's could become the largest gaming empire in the world isn't necessarily a bad thing because Harrah's is a savvy operator that has built a successful business around offering gamblers value for their money, he said.

It's unlikely that Harrah's would change Caesars' upscale properties to fit its mold, he said.

"You would still see a difference between Caesars Palace and Harrah's across the (Strip). I don't think they're going to fiddle with it."

Sun reporter Richard N. Velotta contributed to this report.

Liz Benston is a gaming and tourism writer for the Sun and its sister newspaper, In Business Las Vegas. She can be reached at (702) 259-4077 or by e-mail at benston@lasvegassun.com