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Harrah's folds hand on planned stock offering
NEW YORK (AP) — Harrah's Entertainment Inc. canceled its initial public offering Friday, folding its hand for now on a risky bet on returning to the stock market just three years after it went private.
The company, whose properties include the Flamingo, Caesars Palace and Bally's casinos, was expected to price the offering on Thursday and begin trading on the Nasdaq this week. Harrah's had said it would raise as much as $531 million for casino projects and to help with its heavy debt burden.
The casino operator, based in Las Vegas, had planned its IPO in what has been a rough time for the industry, as people cut back on gambling and opted to save their money instead. Harrah's reported a loss of $634.4 million during the nine months that ended Sept. 30, though recently its business, along with the broader casino industry, has shown signs of improvement.
"Certainly conditions for a potential IPO were worse six months or a year ago," said Matt Jacob, an analyst with Majestic Research. But while things have stabilized in most markets where Harrah's has casinos, they "haven't truly improved yet," he added.
"Potential investors need to be willing to bet on the recovery of the gaming industry beyond what we have seen so far," he said. That means betting on broader economic recovery in the U.S., since hotels and casinos are beholden to consumer sentiment and discretionary spending.
The IPO would have helped ease the company's heavy debt load. Harrah's has nearly $20 billion in debt, and Francis Gaskins, president of IPOdesktop, estimates the company is spending as much as 22 percent of its revenue on interest payments. This would put interest payments at about $1.47 billion for the first nine months of the year.
Much of the company's debt was piled on by two private equity companies — Apollo Management Group, led by buyout titan Leon Black, and Texas Pacific Group — which took Harrah's private three years ago. They paid $30.7 billion in 2007 in one of the biggest leveraged buyouts ever. At that time, private money was on a shopping spree for casino operators, which were considered hot targets for their cash-generating ability and real-estate holdings. Then the financial crisis hit.
The company's revenue, which peaked the year of the buyout at $10.8 billion, tumbled 6 percent to $10.1 billion in 2008 and then an additional 12 percent to $8.9 billion in 2009. Recently, Harrah's business has started to stabilize, and the company had planned to use the IPO to expand. Apollo and TPG planned to keep majority control of it after the IPO.
Harrah's, which plans to change its name to Caesars Entertainment Corp., owns or manages more than 50 casinos in 12 states and six countries. But it lacks a gambling presence in Asia, where casino operators are seeing strong growth, helped by resilient regional economies with an expanding middle class.
"Macau is a bright spot for the industry and Singapore is off-the-charts robust, but it doesn't do Harrah's any good," said Eugene Martin Christiansen, CEO of casino-management consulting firm Christiansen Capital Advisors LLC.
Meanwhile, Atlantic City, where the company operates four casinos, has not yet shown signs of recovery. The expansion of gambling in the New York tri-state area and Philadelphia has increased the pressure on the New Jersey resort city, where Harrah's is the dominant player, said Chris Jones, an analyst with Telsey Advisory Group.
And because of its strong presence in regional markets like St. Louis, Kansas City, Chicago and Mississippi, Harrah's needs "middle-America, salt-of-the-earth customers to start spending more -- a large question mark in terms of the pace of the U.S. recovery," Jones said.
But the industry overall does seem to have reached a turning point. In a recent note to investors, Jefferies analyst David Katz said that with casino sentiment at a "historical low," new property openings and the improving economy should accelerate earnings growth for casinos and gaming companies. According to the Nevada Gaming Control Board, the number of people visiting Las Vegas was up 2 percent in September from a year earlier. Gambling revenue on the Strip, 29 percent of which comes from Harrah's properties, grew 2.8 percent.
Harrah's shelved its offering a day after General Motors returned to Wall Street with its IPO. There have been 130 initial public offerings this year, more than double last year's figure.
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Imperial Palace falls to Harrah's; Biloxi property spurned
Confirming rumors that swirled up and down the Strip last week, Harrah's Entertainment announced Monday that it had acquired the Imperial Palace Las Vegas, in a deal valued at $370 million. The Imperial Palace in Biloxi, Mississippi was not included in the transaction and remains in the hands of the Ralph & Betty Engelstad Trust.
The purchase gives Harrah's an additional 2,640 hotel rooms along the Strip, plus 1,600 slots, 56 table games and a drive-up race-and-sports book. Most importantly, perhaps, Harrah's obtains 18.5 acres of central-Strip real estate. "That was the attraction," said Harrah's spokesman David Strow. "It was a tremendously strategic location."
"So that's strategic for them in that they now control that whole area," said Los Angeles-based analyst Saul F. Leonard, referring to the Flamingo and Harrah's Las Vegas hotel-casinos that flank the Imperial Palace.
"Harrah's is putting together some very, very strategic real estate," confirmed Eugene Christiansen, president of New York's Christiansen Capital Advisers. "You look at that, you look at Caesars Palace and the implication is that Harrah's is: a) Making a no-brainer investment; b) Is making provision for a major expansion in its Strip presence. I look at the map; I couldn't read it any other way. That's something the company needs � a greater presence on the Strip."
However, given the amount of capital recently plowed into Caesars Palace (including the brand-new Augustus Tower) and the Forum Shops, Christiansen doesn't think that if Harrah's is going to make a major statement on the Strip that they're going to do it on the west side. He added, "There was a defensive element here, in that would not have been in Harrah's interest for anyone else to get control of the dirt that Imperial Palace sits on. I have no private indication from the company that this is true, but that's the way I read it."
Because of the narrowness of the parcel on which the Imperial Palace resides, Leonard believes it's likelier that Harrah's will expand its eponymous Strip property and/or the Flamingo rather than try to build a stand-alone facility in place of the Imperial Palace.
"They've also put, in the last 10 years, 400-odd million into their own Strip property," Christiansen noted of recent improvements to Harrah's Las Vegas. "So it'll take a while to amortize those investments, if that's what the company wants to do. On the other hand, when Steve (Wynn) bought the Desert Inn, in the few years preceding it had a $375 million makeover, and Steve just decided to dynamite it and start over."
The Imperial Palace is undergoing its own, $130 million makeover, which came as news to Strow, who added, "I think that will not be proceeding." Imperial Palace spokesman Jeremy Handel said, however, "My understanding is it's going to be business as usual (until the deal closes)."
After that, both the Las Vegas and Biloxi Imperial Palaces will operate under the IP brand in the near term.
"We will not be pursuing that brand in the long term," Strow remarked. Although Harrah's has acquired rights to the brand, it is unclear whether the Biloxi casino-hotel will continue to use the name or not.
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$3b deal would take casino firm private
Company to seek better offers over the next 45 days
Kerzner International Ltd., operator of the Atlantis and Mohegan Sun casinos, agreed to be sold for about $3 billion to a group that includes the company's chairman and chief executive. The shares had their biggest gain in more than three years.
Chairman Sol Kerzner, chief executive Butch Kerzner, shareholder Istithmar PJSC, and other investors will pay $76 a share, 8 percent more than the closing price on Friday.
''There is immense global consolidation in this industry," said analyst Eugene Christiansen of New York-based Christiansen Capital Advisors. ''Everyone is a target. No one is safe. That might be in their minds."
Kerzner's shares jumped $9.07 to $79.43, $3.43 above the offer, a sign investors expect a higher bid for the company.
The company operates the Atlantis Resort on Paradise Island, the Bahamas, and manages the Mohegan Sun in Connecticut. The Kerzners control about 11 percent of the company's shares.
The buyout follows two multibillion-dollar casino acquisitions last year, including Harrah's Entertainment Inc.'s $6.9 billion takeover of Caesars Entertainment Inc.
The group will assume $599 million of debt, Paradise Island, Bahamas-based Kerzner said yesterday in a statement. The deal will be completed by the middle of this year.
The company said it will seek better offers during the next 45 days. The special committee of the board that negotiated the purchase will supervise that effort, and the Kerzners and Istithmar have agreed to cooperate in the process, the company said.