Move to purchase Ohio race track a sign of Harrah's continued push to grow


Harrah's Entertainment's continued willingness to spend tens-of-millions of dollars to pursue growth opportunities — even while the company is trying to work down the largest debt load in the casino industry — is getting some cautious nods of approvals from analysts and onlookers.

The gaming giant Tuesday announced its latest deal: an $89.5 million agreement to buy the Thistledown horse race track in Cleveland from Ontario-based Magna Entertainment Corp.

The bid to buy the race track, which was approved by a bankruptcy judge in Delaware but needs regulatory approval, comes a day after the Review-Journal reported that sources have said Harrah's has purchased part of Planet Hollywood's $860 million debt in a possible bid to acquire the Strip resort. Neither Harrah's nor Planet Hollywood officials would comment on the reported purchases.

David Schwartz, director of the University of Nevada, Las Vegas' Gaming Research Center, said that the "common sense and intuitive response" would seem to be to ask why a company carrying $19.3 billion in debt is "buying more stuff."

Especially, he added, since "the events of the past year, dating from the collapse of Lehman Brothers, kind of validates people who go by common sense judgments."

Jan Jones, Harrah's senior vice president of communications and government relations, however, said company executives believe the current economic environment is providing opportunities for cash-smart investments such as the company's expansion into Ohio's gaming market.

"We're always going to keep ourselves, within reason, in a position where we would be able to take advantage of the opportunities that become available with the right economics," Jones said. "Taking advantage of good economic opportunities is always in the company's best interest."

Union Gaming Group analyst Bill Lerner believes it is misleading to think that Harrah's is in any near-term financial trouble despite its heavy debt load. And he agrees that Harrah's recent moves have been smartly constructed as part of the company's long-term growth plan.

Lerner estimates Harrah's has about $1.4 billion in liquidity to meet its financial obligations, including cash on hand, available credit and minimal debt maturities in the next 12 months.

"(Harrah's) has more liquidity than the market thinks," Lerner said. "They happen to have a lot of debt relative to the amount of cash flow they're generating in this recession. But their debt covenants are structured quite favorably. They're in good relative shape from a liquidity perspective."

Schwartz agreed that Harrah's recent move could look like bold financial moves in a few years, even if the general public is leery of bold financial moves.

"It may be great," Schwartz said. "But the average person who works for the company, or is interested in the company and hears that they're buying more stuff, they may ask why."

Harrah's dealmaking is coming even while the company has been working to cut its current multibillion-dollar debt so it can avoid having to file for bankruptcy.

The company announced plans Sept. 8 to issue $720 million in new notes due 2017 to buy down a portion of its existing term loan and revolving credit facility.

Harrah's trimmed its debt in the second quarter by 20 percent through two exchange offers and a debt paydown.

Harrah's has nearly $501.8 million in debt maturing next year and $168.9 million due in 2011, the company's second quarter report in August filed with the Securities and Exchange Commission showed.

Because of its debt reduction moves, Lerner said Harrah's owners — private equity firms Apollo Management and TPG Capital — "have no meaningful debt maturities for several years."

That company's financial positioning has allowed them to pursue other deals, too.

Last week, a partnership with a London-based online entertainment company was announced that will help Harrah's enter the United Kingdom's online casino market with its Caesars Casino and World Series of Poker brand.

The company is also pursuing less cash-intensive opportunities, including lobbying to legalize online gaming in the United States, pursuing a possible branding partnership for the Aqueduct Raceway casino in New York, and monitoring efforts for possible new casino legislation in Rhode Island and Massachusetts.

Harrah's also has been mentioned as a possible operator and manager of the Fontainebleau Las Vegas if it is successfully acquired in bankruptcy by Apollo Management.

Tuesday's announcement said Harrah's has agreed to pay $42 million cash at closing for the Cleveland race track.

The remaining $47.5 million would hinge upon the successful resolution of several legal challenges to Ohio's plan to install the slot machines. Anti-gaming advocates have filed lawsuits seeking to have the issue put to voters in a referendum, and challenging whether slot machines are permitted under Ohio's constitution.

Nancy Rapoport, a bankruptcy law professor at the University of Nevada, Las Vegas, said Harrah's is betting that the revenues from its recent purchases will offset their cost and not add to the company's current debt.

"But in this economy, all bet's are off," Rapoport said. "They do have smart analysts. You hope their board has thought about this. They like risk. You don't make your money being cautious."

Contact reporter Arnold M. Knightly at aknightly@reviewjournal.com or 702-477-3893.

 

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