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Harrah's priority: Reduce debt


Gaming Wire,  Thursday, December 21, 2006 at 10:15:05 AM

Casino giant Harrah's Entertainment's debt load will nearly double and its priority will shift to paying it down instead of reinvesting in growth after one of the biggest leveraged buyouts ever, SEC documents filed Wednesday show.

Harrah's Chief Executive Officer Gary Loveman told key employees that the company's debt would rise to $21 billion, or eight times operating profits, from the current multiple of 4.7, after being bought by Apollo Management Group and Texas Pacific Group, according to a presentation he made Tuesday after the deal was announced. Other Securities and Exchange Commission filings show Harrah's current debt is $10.7 billion.

Equity in the company will shrink from more than $14 billion to $7 billion, SEC documents show. One slide from Loveman's presentation was titled: "With high initial debt levels, capital allocation priorities will likely change."

Harrah's historical priorities show two check marks beside "reinvest for growth" and "mergers and acquisitions," but only one beside "share repurchases" and "reduce debt." Under the new structure, only one check mark goes toward reinvestment and acquisitions, while two appear beside reducing debt.

Loveman's presentation backs up some analysts' conclusions that the company's growth plans will take a back seat to debt repayment after it accepted a $17.1 billion buyout bid by the private equity firms.

Standard & Poor's Ratings Services on Wednesday lowered its ratings on Harrah's to "BB" from "BB+" to reflect the expected higher debt load. It left the company on credit watch for a further downgrade.

"The financial realities of being a moderately leveraged company to being a highly leveraged company is that there's just less financial flexibility on a capital spending front," Susquehanna Financial Group analyst Robert LaFleur said. "You have competing uses for each dollar of free cash flow. You know, do you invest it in another project or do you use it to de-lever the company that you just levered up to financially execute this transaction?"

In an investors note released Wednesday morning, LaFleur said that although Harrah's current management team will remain in place, the new owners also may want to shed some casinos that might help pay down some of the company's $10.7 billion debt.

"We believe the new owners will look to shed some noncore assets, such as the Rio, Showboat (in Atlantic City), and others, before the closing or shortly thereafter," LaFleur said. "Although Chief Executive Officer Gary Loveman said in an interview after the announcement that asset sales will not be a 'big part of [the] story,' Loveman did intimate that Harrah's Las Vegas Strip redevelopment may be slowed."

LaFleur said Harrah's highly leveraged balance sheet could benefit the company's competitors.

"We look for additional restraints on capital spending throughout the company," LaFleur said. "At the end of the day, this is a net positive for Harrah's competitors, especially Las Vegas operators like Boyd and MGM Mirage, which are funding massive projects on the Strip."

Meanwhile, The Wall Street Journal reported Wednesday that Harrah's is proceeding with a reorganization plan that will reduce the company's 85,000 person work force once the buyout is completed.

SEC documents filed late Tuesday also showed that should the buyout deal collapse, one of the companies will have to pay the other a breakup fee of at least $500 million.

Harrah's, the world's largest casino operator, and the private equity groups said they expected it would take a year to complete the sale, the largest ever leveraged buyout of a gaming company and the sixth largest leveraged buyout of an American corporation.

The merger agreement has a cutoff date of March 1, 2008, when the price per share will go up a little less than 2 cents a day until the transaction closes. In addition, Harrah's board of directors has until Jan. 13 to solicit a bid from suitors that would be superior to the price agreed upon with the private equity groups.

According to a Form 8K filed with the SEC, if the Harrah's board finds a larger offer and strikes a new deal, the company would have to pay the private equity groups $500 million in a termination fee. If Harrah's shareholders reject the deal, the company has to cover up to $60 million of the private equity group's transaction expenses.

If the deal falls apart because the private equity groups can't obtain financing or regulatory approval, Texas Pacific and Apollo would have to pay Harrah's a $500 million termination fee.

The 77-page merger agreement was also filed with the SEC late Tuesday.

Although Harrah's executives have said the company will operate normally while the deal proceeds, some gaming analysts expect Harrah's to sell some nonstrategic assets in various markets.

"We have no plans to sell any of our casinos," Harrah's Chief Financial Officer Jonathan Halkyard said. "Our plan is to operate the company and proceed forward with our various growth initiatives."

Harrah's operates almost 40 casinos, including such brands as Harrah's, Caesars and Horseshoe. In Las Vegas, Harrah's operates seven casinos -- Harrah's, Flamingo, Caesars Palace, Bally's, Paris Las Vegas, Rio and Imperial Palace -- and is in buying Barbary Coast. That deal is the result of a land swap with Boyd Gaming Corp.

The Barbary Coast and its 4.4 acres would give Harrah's some 350 acres contiguous with the Strip for development purposes. Harrah's said the land, in total, cost approximately $13 million an acre. The company is exploring options for the 350 acres, including redeveloping some casino properties.

Harrah's also owns the lucrative World Series of Poker and operates casinos in Canada and Uruguay. The company has development deals in such countries as Spain and Slovenia and has a deal in place to buy United Kingdom casino operator London Clubs International.

In 2005, Harrah's reported earnings of $236.4 million on revenue of $7.1 billion. The company has a current market capitalization of almost $15 billion.

The Associated Press contributed to this report.



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