Friday, September 12, 2003
Copyright © Las Vegas Review-Journal

MERGERS AND ACQUISITIONS: Boat sale to Harrah's official

Analyst calls Horseshoe Gaming deal 'defensive'

Horseshoe Gaming's riverboat casino in Tunica, Miss., above, is one of three sold by Horseshoe Gaming Holding Corp. to Harrah's. AP Photo Click above for enlarged image.

Harrah's Entertainment on Thursday confirmed signing a definitive agreement to buy Horseshoe Gaming Holding Corp. for $1.45 billion, but the announcement left some Wall Street analysts scratching their heads.

"We consider this acquisition defensive and think Harrah's is paying peak (price) to keep another competitor out of those markets," Deutsche Bank analyst Marc Falcone said.

While Harrah's President Gary Loveman admitted the acquisition is partly defensive, he also said the move will add "high performing assets" that will improve his company's "growth profile."

Deutsche Bank analyst Marc Falcone said the acquisition of Horseshoe from owner Jack Binion will "give Harrah's great properties, earnings growth through acquisition and another strong brand."

Gaming regulators in Indiana, Mississippi and Indiana must approve the sale. Both companies said they expect the deal to close early next year.

Horseshoe Gaming operates riverboat casinos in Hammond, Ind.; Bossier City, La.; and Tunica, Miss.

Joe Greff, gaming analyst at Fulcrum Global Partners, an independent Wall Street investment research firm, said the buyout will prove positive for Harrah's in the long run because it also "diversifies cash flow away from (more competitive) gaming markets such as Atlantic City."

In addition, he said the purchase price is reasonable and Harrah's will enjoy a variety of synergies that will help cut costs.

However, Falcone said: "We think the company is paying up for the properties and doesn't gain access to any new distribution points, which has been the justification for past acquisitions."

In a telephone press conference Thursday, Loveman conceded buying the three-riverboat company based in Las Vegas is defensive in part.

"Licenses in a limited license environment are very important, very valuable. Owning them creates value," he said. "(And) defensively, another bidder had been in it. Had they acquired (Horseshoe Gaming), we'd have had formidable competition. We didn't want them competing."

Sources had told the Review Journal that Las Vegas-based Ameristar Casinos was offering $1.39 billion for Horseshoe Gaming.

Loveman explained Thursday the acquisition also has a "very significant offensive component. (Horseshoe Gaming) has high-performing assets with a significant growth profile ahead of them."

The Horseshoe name "has tremendous brand equity. We believe casinos opened in any area under the Horseshoe brand would do better than any other brand name than Harrah's," he said.

However, Loveman conceded that Harrah's had not bought the right to operate the casinos in Nevada under the Horseshoe name.

He said the company is negotiating with Becky Behnen, Jack Binion's sister who owns Binion's Horseshoe in downtown Las Vegas, to use the name here and is confident an agreement can be reached.

Loveman also said Harrah's would be interested in buying and operating Binion's Horseshoe.

In addition, he said Harrah's would review the possibility of rebranding some of its casino operations under the Horseshoe name, but no decisions have been reached.

Harrah's also intends to sell its Harrah's casino in Shreveport to avoid overexposure in that market, but will retain its Louisiana Downs thoroughbred horse-racing track and casino in Bossier City. Harrah's expects no other property sales related to the Horseshoe transaction.

Deutsche Bank downgraded the shares to "hold" from "buy."

"We think investors will be reluctant to reward the company with a higher multiple until the existing portfolio shows some growth and they get more comfortable that this acquisition is achieving its goals," Falcone said.

Other analysts were more upbeat about the acquisition.

Standard & Poor's Ratings Services affirmed its BBB- credit rating on Harrah's following the announcement and placed Horseshoe on CreditWatch "with positive implications."

Although the transaction will be 100 percent debt financed, Harrah's has a history of financing acquisitions with debt and then cutting its borrowings quickly, Standard & Poor's credit analyst Michael Scerbo said.

However, he also warned that Standard & Poor's expects the company to act in a similar manner with this transaction.

Harrah's Entertainment was advised by Bear Stearns & Co. and J.P. Morgan Securities in the acquisition and the deal is expected to close in the first quarter of 2004, Loveman said.

In Thursday trading on the New York Stock Exchange, Harrah's shares rose $1.08, or 2.71 percent, to close at $40.95.