Harrah’s board considers options for its future

By Liz Benston (contact)

Thursday, Dec. 14, 2006 | 7:20 a.m.

The proposal to take Harrah's Entertainment private - to free itself of hard-to-please shareholders and get cash-flush - no longer seems as slam-dunk certain as it once was.

Company directors meeting Wednesday were considering three options for the world's biggest gaming company.

They appeared divided on whether to accept a buyout offer from private equity giants Apollo Management and Texas Pacific Group. The board is expected to continue its evaluation today of the most profitable route for shareholders, given Apollo and Texas Pacific's bid, which started at $81 per share and has been growing.

The question has become complicated by a competing bid from Penn National Gaming, a publicly traded racetrack casino company from Pennsylvania that is one-fourth the size of Harrah's. It has offered a competitive bid to be raised mostly through issuing debt.

The third option would be for Harrah's to keep its current ownership course - and boost its stock price through a riskier, uncommon strategy called recapitalizing. It would allow Harrah's to issue a significant amount of debt to buy back a big chunk of stock at a higher price. Reducing the number of outstanding shares increases earnings per share and ultimately helps boost the company's stock price.

This is a lot to swallow for an industry that is a relative newcomer to private equity money, not to mention the nuances of the public stock markets. Experts say the route taken by Harrah's may help determine the future of major corporate investment in the casino industry.

In any case, it won't be an easy decision.

Harrah's Chairman and Chief Executive Gary Loveman has reason to support an Apollo buyout because he would likely remain at the helm of Harrah's while benefiting from the growing value of his existing shares as well as an added stake in the newly private company. He probably wouldn't stay in the event of a buyout by Penn National, which might remove duplicate positions from the combined entity.

The competing gaming company also would love to tap into Harrah's gambler loyalty club.

Other shareholders and Harrah's executives don't have such clear-cut reasons to support or reject the Apollo deal and may seek more time to consider all options.

Apollo and Texas Pacific Group have had more than a month to sweeten their original offer of $81 per share. They also have been doing their homework, as Apollo reps have been touring the company's Las Vegas casinos over the past week.

The board appears to be moving cautiously, wary of stockholder lawsuits questioning its judgment.