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Gambling attracts new bettor: Equity firm
By Peter Edmonston and Michael J. de la Merced The New York Times
Published: October 2, 2006
NEW YORK Private equity firms, their pockets bulging with cash, may have found a new area to place their multibillion-dollar bets: the gambling industry.
Harrah's Entertainment, the largest casino operator in the United States, said Monday that Apollo Management and Texas Pacific Group had offered to acquire it for $15.05 billion in cash, or $81 per share.
The announcement ignited speculation that the U.S. casino business, whose thicket of regulations has traditionally kept investment firms at bay, could attract more such proposals.
Combined with Harrah's long-term debt of nearly $10.7 billion as of June 30, the buyout proposal carried a value of $25.8 billion, making it one of the largest leveraged buyouts ever.
Shares of Harrah's, which owns or manages more than 40 casinos under the Harrah's, Caesars and Horseshoe names in Las Vegas, Atlantic City and elsewhere, were quoted at $75.72, up 14 percent, at $9.29 in late trading in New York.
Shares of Harrah's rivals MGM Mirage and Boyd Gaming also rose. The sector may also have been lifted by the decision by the U.S. Congress to pass a bill on Saturday that would ban most forms of Internet gambling.
Harrah's said Monday that it had formed a special committee of directors to evaluate the offer, adding that it had not decided whether going private was in its shareholders' best interests.
The committee has hired the investment bank UBS and the law firm Kaye Scholer as advisers, Harrah's said. The buyout offer was reported Monday by The Wall Street Journal.
Private equity firms have raised billions of dollars in recent months to buy publicly traded companies, with the goal of reselling them or taking them public down the road at a profit.
The influx of capital has created pressure to find suitable takeover targets, including some in businesses like technology that buyouts firms traditionally avoided.
One of the few private equity firms to make deals in the gaming sector has been Colony Capital, said Jeffrey Logsdon, an equity analyst at BMO Capital Markets who covers the gaming sector.
"The regulatory environment is very rigorous," he said, adding that state gaming boards have typically required extensive disclosure of financial information from individuals involved such transactions.
If a deal is completed, it could limit Harrah's future growth, said Jake Balzer, a leisure and entertainment analyst with Guzman Company. While private equity's interest in the casino business is understandable, given its strong cash flows, the proposal could divert Harrah's cash to servicing its debt rather than fueling its expansion efforts in Europe and Asia, Balzer said.
"I don't think it makes a lot of sense to stifle those opportunities by taking the company private," he said, noting that he still considered Harrah's undervalued and has assigned an $83 target price for its stock.
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