Harrah’s looking at Caesars

By Liz Benston (contact)

Wednesday, July 14, 2004 | 11:03 a.m.

Harrah's Entertainment Inc. is discussing a potential purchase of Caesars Entertainment Inc. in a Las Vegas-driven megadeal that today drew mixed reactions from Wall Street.

A source close to the talks confirmed the discussions, which would create a behemoth even larger than the goliath to be created by MGM MIRAGE's pending $7.9 billion buyout of Mandalay Resort Group.

The talks began after last month's agreement by MGM MIRAGE to acquire Mandalay and are "very serious," the source said. The sale price wasn't clear this morning.

Shares of Caesars jumped this morning on reports of the talks. Caesars stock was up about $1.80 per share or 13 percent to $15.73 in early trading this morning. Harrah's shares fell about 69 cents or 1.3 percent to $51.29 this morning on the news.

Caesars Entertainment spokesman Robert Stewart could not be reached for comment this morning. Representatives of Harrah's Entertainment Inc. also could not be reached for comment.

Harrah's -- the country's most geographically diverse casino company -- operates 28 casinos including two in Las Vegas, one in Reno, three in Lake Tahoe and one in Laughlin. Other casinos are scattered across 11 other states including New Jersey as well as Illinois, Indiana, Missouri, Iowa, Mississippi, Louisiana. Harrah's also manages four casinos for Indian tribes in California, Arizona, Kansas and North Carolina. Caesars operates about the same number of casinos but they are more concentrated in Las Vegas, Atlantic City and Mississippi. Caesars also operates casinos in Lake Tahoe and Reno as well as Indiana, Louisiana, Delaware, Nova Scotia, Ontario, Australia, South Africa and Uruguay.

Harrah's has expressed interest in having a greater presence in Las Vegas, where its Harrah's Las Vegas, Rio and Binion's Horseshoe casinos are successful but don't give Harrah's the bulk to more vigorously compete with Caesars, MGM MIRAGE, Mandalay, the Venetian and Steve Wynn's upcoming megaresort.

The strength of the tourism rebound in Las Vegas as well as expansion plans soured by tax increases and regulatory hurdles in other states has boosted the company's interest in Las Vegas, analysts say.

Still, the news left some analysts scratching their heads. It will be a challenge for Harrah's to consolidate the Caesars assets and may not make strategic sense for Caesars, they said.

The MGM MIRAGE-Mandalay deal would create a powerhouse in Las Vegas, the nation's strongest and most stable casino market. But a Harrah's-Caesars combination would instead create concentrations in regional markets that haven't performed as well and have more limited growth prospects, such as Mississippi and Indiana, analysts say. Harrah's also would be picking up some underperforming Caesars assets in some markets, they said.

"Mississippi is a highly competitive market and management teams have had to work overtime to hold it together there," Jefferies & Co. bond analyst Ray Cheesman said. "People have just been chipping away at each other."

Besides potential antitrust and competition issues in markets such as Northern Nevada, Atlantic City, Indiana, Louisiana and Mississippi; the deal also could create new regulatory hurdles for the pending MGM MIRAGE-Mandalay deal.

"If regulators allow (MGM-MANDALAY) to go through, how do (they) say no to the next one or demand modification? It seems like they have seriously turned up the heat in the kitchen because now you have less competition," he said.

Harrah's would be acquiring a concentration of assets in Atlantic City, where Harrah's has two casinos and Caesars has three. Both companies also operate casinos in the Reno-Tahoe area of Northern Nevada, Louisiana, Mississippi and Indiana, raising antitrust concerns in those markets as well, analysts said. Some analysts said regulators would likely require asset sales in Atlantic City and possibly in Mississippi and Indiana.

"While the MGM MIRAGE-Mandalay merger has the strategic underpinning of leveraging growth in the Las Vegas market, we would not say the same opportunity exists in the regional markets such as Atlantic City and Mississippi," Goldman, Sachs & Co. gaming analyst Steven Kent said.

Harrah's -- which recently closed a deal to buy Horseshoe Gaming Holding Corp.'s riverboat casino empire and is working on casino opportunities in Britain -- could be spreading itself too thin, Kent added.

"We suspect that the potential acquisition of Caesars would shift management's time from seeking growth opportunities and focusing on current operations to dealing with gaming commissions, antitrust issues and divesting assets," he said. "By acquiring Caesars, Harrah's would not be acquiring one company but a hodge-podge of brands that would need TLC, strategic focus and more importantly, capital."

The deal also could decrease the market potential in Pennsylvania, which recently passed a bill to legalize slot machines but has limited the number of licenses one operator can have, analysts said.

But Merrill Lynch analyst David Anders said the deal makes sense in part because Harrah's could use its slot club and gambler tracking technology at Caesars' less efficiently run properties.

"Caesars incurs roughly $45 million in corporate expenses (per year) which could be greatly reduced with consolidation," Anders wrote in a research note to investors today.

Fulcrum Global Partners analyst Joe Greff said he doesn't understand the rationale for the deal other than Harrah's desire for a greater Las Vegas presence.

"I think that the price to buy (Las Vegas) assets have gone up and the price for what they can buy Caesars for has narrowed," he said. Harrah's may see it as an opportunity to buy good brands that are improving, he said.

But Cheesman said Caesars -- which lacks the strong growth catalysts of some of its peers -- may view a buyout as the only conceivable way to significantly raise the company's share price.

Harrah's could sacrifice its precious investment grade bond rating if it takes on Caesars' sizeable debt, though it could issue stock instead to pay for the company, analysts said. Harrah's is the only major gaming company that doesn't have a "junk bond" rating and has been striving to keep that rating intact, they said. Harrah's carries more than $3 billion in debt and Caesars has more than $4 billion.

Bond rating agencies couldn't be reached for comment this morning.

Nevada Consumer Advocate Tim Hay said the state will be watching both deals.

"Certainly consolidation in and of itself -- when you have got increasingly large players controlling such a large share of the market -- is something to be concerned about," Hay said. "Whether there is something that is actionable there is going to be determined down the road. We haven't seen any of the details at this point."

Steve Wynn said this morning that Harrah's interest in Caesars is no surprise to Wynn Resorts executives.

"We've been expecting this deal for three weeks," Wynn said.

Wynn said Harrah's has a logical interest in expanding its presence on the Strip, and that after Mandalay Resort's sale to MGM MIRAGE was announced, taking Mandalay off the table, Caesars was the next option.

Wynn said Harrah's has been frustrated in its efforts to buy Strip property, including a failed attempt to buy Phil Ruffin's New Frontier property across the street from the $2.4 billion Wynn Las Vegas.

He also said Harrah's is a well-run company, one he expected to take advantage of its new Strip assets if the deal goes through.

"Harrah's will do a better job running the Caesars properties than the Caesars people do," he said.

Wynn said a Harrah's-Caesars combination will be a plus for Las Vegas, with Harrah's likely better able to use its geographically diverse operations to funnel visitors to the Strip.

"That will help Las Vegas," he said.

Wynn said the proposed merger won't hurt Wynn Resorts.

"We're the small guy looking to grow," he said. "Bigger ain't better. Better is better."