Potential $15.5 Billion Harrah’s Deal Getting Extra Scrutiny

When word leaked out that Harrah’s Entertainment (NYSE: HET) was offered $15.1 billion in cash to go private a couple of weeks back, both public and private markets were sufficiently shocked. If consummated, the deal would be the fourth largest leveraged buyout of all time.

While it’s widely seen as a good deal for private equity firms Apollo Management and Texas Pacific Group, the deal is starting to make some Harrah’s stockholders so skittish they’ve filed suit to stop the potential transaction from taking place.

Currently, Harrah’s rakes in about $2.4 billion a year and owns some of the most well known casino hotels under the Harrah’s, Caesars and Horseshoe brands.  The current story actually begins last July when the company’s board decided it would let the company’s stockholder’s rights plan expire on October 5. The plan was also known as a poison pill, and had elements within it that are used to make a hostile takeover less attractive.

Interestingly enough the original offer from Apollo and Texas Pacific Group was made October 2. The poison pill is now expired.

Though no allegations have been made outright about any unsavory behind the scenes negotiations, Brian Gordon, Principal with Applied Analysis, told Hotel Interactive speculation is that insiders are the ones who have triggered the potential privatization.

“It is unclear who initiated the transaction and [the parties] haven’t responded publicly,” said Gordon.

No matter who initiated the transaction, certain shareholders are unhappy with the deal and are suing to squelch the deal. Two shareholders filed suit last week alleging the asking price of $81 per share was too low, which was a 22 percent premium that day. Now shares of HET are trading at just under $74 per share.

The suit, filed in a Delaware Chancery Court, seeks to block this deal and seek other bids. Documents obtained by Reuters indicates the heart of the lawsuit is current Harrah’s management seeking some sort of an inside deal. The lawsuit, field by Henoch Kaiman and Joseph Weiss, claims the proposed deal is “an apparent camouflaged management buyout."

According to Reuters, the proposed class-action lawsuit indicates the offer was timed to take advantage of a recent slump in the share price of Harrah's. Additionally, it alleges, Harrah's CEO Gary Loveman "expects to be part of an eventual deal, but took careful steps not to make the negotiations appear like the typical management buyout."

Additionally, the AP indicated there were higher than normal call options trades -- between four to six times the August average depending on the day -- ahead of the original announcement of the buyout offer. The report also said the trading “has raised suspicions among insider trading experts, but regulators were mum on whether an official probe had begun.”

At Hospitality Real Estate Counselors, vice president Chris Stein said he is not so sure this is a good deal for shareholders in the company, who confirmed that suing stockholders indicates just that.

“I am not 100% sure the stockholders are going to think this is a slam dunk deal,” said Stein, who indicated that even though the deal was for more than $15 billion, it was too low and that perhaps large stakeholders are looking start a bidding war. Already the bid has been upped  by about $400 million ($2 per share to $83), but its likely the price will continue to increase.

Earlier this year, a bidding war over Aztar erupted bringing in multiple bidders are raising the price from $38 to $54 a share. The Aztar deal with another private equity firm, Columbia Sussex, is expected to close by year’s end.

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“Even with this new [Harrah’s]  bid, people are saying its undervalued,” said Stein.

If the deal is proven to be legitimate, Dave Schwartz the Director of the Center for Gaming Research at the University Nevada Las Vegas (UNLV)said regulatory issues could be a challenge.

“This is not the same as buying a hotel chain. There are levels of people that need to get licensed, which complicates [the process]. Everyone has to be investigated and licensed and it is a time consuming and expensive process. And it has to happen in every state Harrah’s has a casino,” said Schwartz.

But how can one of the largest potential deals of all time be so undervalued? Two words: Real estate, experts said.

Harrah’s has recently finished assembling an unbelievable 350 contiguous along either side of the Las Vegas Strip in a market where Strip front acreage sells for as much as $16 million per acre -- the price of the nearby Tropicana when it was sold as part of the Aztar portfolio.

But its not only the value of the land is something, but maximizing the value of the land.

Currently, Harrah’s has what many consider to be underperforming properties with aging infrastructure that cannot compete with new projects such as the under construction $7 billion Project City Center from MGM Mirage Corp, and other mega resorts such as the $2.7 Wynn Vegas and the soon to open $3 billion Palazzao, Las Vegas Sands’ follow up to the incredibly successful Venetian.

Harrah’s owns properties such as Imperial Palace and Bally’s which are not designed to attract today’s gaming enthusiast or conference attendee. By going private, experts believe the company can initiate a profitable redevelopment strategy without having to face the specter of Wall Street and the constant demand for quarterly operating performance.

Hospitality Real Estate Investors’ Stein said fully developing the Strip is an “enormous opportunity.”

“If they become a private the company won’t have to face scrutiny. A lot of times organizations have ambitious development plans they want to put into action but they get caught up with the rigors of being a public company. A private company can come in and put that plan into action,” said Stein, who added the group can also sell off non core assets to further fuel development growth.

At Applied Analysis, Gordon agrees. “Clearly a strategy has been put in place by current management,’ he said. 

UNLV’s Schwartz said it will allow the company to take properties off line. “They can do more strategic planning and do more for the long haul,” he said.

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