Wednesday, July 14, 2004
Copyright © Las Vegas Review-Journal

UPPING THE ANTE: Harrah's courts Caesars

Merger of two gaming companies would eclipse proposed MGM Mirage-Mandalay deal

People pass the entrance to the Harrah's Las Vegas hotel and casino within sight of the Forum Shops at Caesars across Las Vegas Boulevard. Owners of the two properties are discussing a merger, creating a gaming company that would lead the industry in revenues. Photo by Craig L. Moran.

In a classic play of one-upmanship, Harrah's Entertainment is negotiating to buy Caesars Entertainment and create a gaming company that would surpass even the combined MGM Mirage-Mandalay Resort Group in size, sources said Tuesday.

A senior source at Harrah's said his company "is taking a shot at Caesars Entertainment" and an announcement is likely as early as today.

Sources close to Caesars who asked not to be named confirmed negotiations have been going on for at least three weeks, but said it is unlikely final agreement will be reached as soon as today.

Caesars spokesman Robert Stewart was not available for comment Tuesday, and Harrah's spokesman David Strow said his company had nothing "to announce today" about any possible deal.

"It makes perfect sense that these two companies would be talking with one another. If (Harrah's President) Gary Loveman wants to be No. 1 in gaming, there are very few options for him," said Deutsche Bank analyst Andrew Zarnett.

Sources familiar with the talks said the divestiture of Caesars' operations outside Las Vegas have so far proved to be the major stumbling block to reaching an agreement.

A Harrah's-Caesars combination, including the Horseshoe Gaming operations Harrah's recently acquired for $1.45 billion, would lead the industry in revenues and other financial measures such as cash flow, a key measure of profitability, he said.

Harrah's and Caesars together would have combined annual revenues of $9.4 billion and cash flow of $2.3 billion.

That would eclipse the combined annual revenues of $6.9 billion and cash flow of $2.1 billion that MGM Mirage expects if its $7.9 billion buyout of Mandalay Resort Group is consummated. When the MGM Mirage-Mandalay deal was announced in June, it was expected to create what would be the world's largest gaming company in terms of revenues and cash flow.

Analysts said any deal for Caesars will come at a stiff cost for Harrah's, with a price tag for the whole company possibly in the neighborhood of $10 billion. They noted, however, that Harrah's already has stock and bond shelf registrations for financing that could handle the deal.

Several sources who asked not to be named said the talks make sense, particularly since Harrah's is very focused on picking up prime hotel-casinos and real estate in Las Vegas and boosting the scale of its marketing operations.

"Right now, size definitely matters in this marketplace," said Jim Medick, chief executive officer of the MRC Group Research Institute, Nevada's largest market-research and public-polling firm.

"Harrah's database has always been the benchmark for the industry. This will create one hell of a marketing tool and will keep them in competition with (the combined) MGM Mirage and Mandalay," Medick said.

"It'll be interesting as economies of scale and databases get larger to see how the smaller and independent companies can compete."

University of Nevada, Las Vegas professor and casino industry expert Bill Thompson said Harrah's will have to change its marketing if it does merge with Caesars.

"They'll be in a position to be all things to all people for the first time, and will be able to go after high rollers as they never have before," he said.

A Wall Street analyst who asked not to be named said Harrah's urgently wants the added scale and extra exposure in Las Vegas and said "there are very limited ways to accomplish that."

Some sources in Las Vegas have speculated in recent weeks that Harrah's would try to buy Boyd Gaming Corp. Boyd spokesman Rob Stillwell said Tuesday no conversations are under way and Harrah's never contacted his company about a possible deal.

The Wall Street source also questioned how much exposure Harrah's might be willing to accept outside Las Vegas, where Caesars has substantial casino operations.

Deutsche Bank analyst Marc Falcone said a combined Harrah's-Caesars may have to divest itself of holdings in Atlantic City, Lake Tahoe and Indiana to resolve regulators' antitrust concerns.

"In order for a transaction to be consummated, it would require significant divestitures. The question, then, is what is Harrah's looking for. I think it wants to find cheaper ways to increase access to Las Vegas and Atlantic City markets," he said.

However, Falcone suggested, in the end, Harrah's and Caesars could agree on a deal that involved buying specific hotel-casinos rather than a merger that would require the divestiture of several hotel-casinos.

In either case, Caesars sources said it was premature to speculate on how the divestiture issues might be resolved.

Wall Street analysts also said the divestiture issues could prove particularly complex because of the pending merger between MGM Mirage and Mandalay.

In fact, one speculated that the two mergers together would increase market concentration in Las Vegas so much that the Federal Trade Commission might throw them both out.

Market concentration, especially in terms of the number of hotel rooms and slot machines operated by gaming companies, is one of the major criteria federal and state regulators use to evaluate the anti-competitive impact of gaming mergers.

Caesars sources Tuesday said attorneys from Harrah's have been working in Caesars' corporate offices in Hughes Center on Paradise Road, on the due diligence process, including reviewing financial documents and looking at which individual properties might be sold off.

Founded more than 60 years ago, Las Vegas-based Harrah's operates 26 casinos, including Harrah's and the Rio in Las Vegas, in 13 states under the Harrah's, Harveys, Rio and Showboat brand names and has 41,000 employees.

Las Vegas-based Caesars has 27 properties, including the Strip landmark Caesars Palace and the Flamingo, Bally's and Paris in Las Vegas, in five countries on four continents and 54,000 employees.

Formed in December 1998 as Park Place Entertainment Corp., Caesars Entertainment adopted its new name in January 2004.

Caesars closed Tuesday at $13.92, up 59 cents or 4.4 percent on 2.8 million shares, 50 percent above normal trading volume. Harrah's closed at $51.98, up 35 cents or 0.68 percent on 900,000 shares, double normal trading volume.