Harrah's Buyers Promise Growth

CARSON CITY — Executives for Harrah's Entertainment say the more things change, the more they'll stay the same.

The company cleared a major hurdle Dec. 5 when the state Gaming Control Board unanimously recommended approval of the company's Harrah's debt — to subsidiaries of two private equity companies.$17.7 billion sale — $31.3 billion including the assumption of $13.6 billion in

Approval was granted largely because company executives and representatives of Apollo Management and Texas Pacific Group told regulators there wouldn't be any major changes in the way the gaming giant operates.

By nearly every criteria, Harrah's is the largest casino company in the world with 48 properties, more than 30,000 hotel rooms and more than 3 million square feet of casino space.

In Nevada the company has more than 37,000 employees and operates Caesars Palace, Harrah's, Paris Las Vegas, Bally's, Flamingo, Imperial Palace and the Rio.

In a two-hour hearing, executives with Harrah's, Apollo and TPG Capital sailed through questioning by the three-man regulatory board whose recommendation will be considered by the Nevada Gaming Commission on Dec. 20.

In addition to the commission, gaming regulators in Pennsylvania , Iowa and Louisiana have to approve the deal before it can close. The deal already has been approved in New Jersey , Mississippi , Indiana , Illinois and Missouri .

Harrah's officials have said they anticipate the deal will close by the end of the year.

Harrah's Chief Executive Gary Loveman took any potential controversy head-on in his opening statement. He addressed recent allegations that the company performed construction in rooms at its Harrah's and Rio properties in Las Vegas without getting Clark County permits, and he discussed his company's diversity initiatives.

Both were considered to be potential bones of contention with regulators, since the construction matters have made newspaper headlines and black community activists said they wanted to call attention to the company's diversity record, which they contend isn't very good.

But Control Board members acknowledged that Clark County was checking the construction matter, and that there's no requirement or standard to judge diversity programs.

The fact that company officials say there would be few changes in the way Harrah's conducts business lent comfort to the regulators. Loveman and his management team will continue to run day-to-day operations.

The licensing applications for the new executives — principals Leon Black, JoshHarris and MarcRowan and partners Jeff Benjamin, Anthony Civale and Rick Press for Apollo and principals David Bonderman and James Coulter and partners Jonathan Coslet, Kelvin Davis and Karl Peterson for TPG — were so clean that regulators didn't ask any questions about their backgrounds.

The reason: Most already have been scrutinized by some federal and state regulators, including the Defense Department, the Federal Aviation Administration, the National Association of Security Dealers, the Federal Communications Commission and the Federal Energy Regulatory Commission.

Benjamin and Davis have been licensed by Nevada gaming regulators, having served on the boards of Mandalay Resort Group and Harveys Casino Resorts, respectively.

Loveman said there are advantages to having private equity investors instead of public shareholders. Private equity, he said, provides long-term, patient investors while public shareholders can come and go quickly based on the movement of stock prices.

As managers of investment capital, Apollo and TPG Capital will have access to funds such as the Indiana State Teachers' Retirement Fund and the public employee retirement systems of Nevada , Iowa and Pennsylvania .

Those companies also manage funds for companies such as GM, Boeing, Lucent Technologies, 3M and Duke University.

The two companies, both founded in the early 1990s, have more than $70 billion in assets between them.

Apollo and TPG have invested in a number of major franchises, including several in the hospitality industry. Among companies they've invested in are Saks Inc., Neiman Marcus, Petco, Univision, Telemundo, Burger King, Alltell Wireless and the Raffles and Wyndham hotel franchises.

In some cases, the Apollo and TPG investments have produced remarkable turnaround stories. The partners bought Continental Airlines out of bankruptcy when it was operating with more than Houston and Newark, N.J. , and shedding unprofitable routes.$100 million in annual operating losses and turned it into a money-maker by expanding hubs in

The company also acquired the Vail ski area, whose parent company, Gillett Holdings, went into bankruptcy.

When the partners picked up Vail, it had cash flow of under Colorado 's Breckenridge and Keystone resorts and Lake Tahoe's Heavenly to the fold, built 4,100 hotel rooms, increased cash flow to $40 million a year. Within 14 years, the company added $175 million and took it public in 1997.

In Harrah's, the investors see an attractive industry with stable and recession-resistant cash flows, a company that is a leader in most of the markets it's in, several growth opportunities and a seasoned management team.

Regulators asked whether the companies had considered an exit strategy when the investment runs its course. Representatives said in several years they could consider taking the company public again. But for now they plan to pursue Harrah's growth strategy, which includes a $1 billion expansion at Caesars that is expected to be completed in 2009 and the construction of a 20,000-seat sports arena on land east of Bally's and Paris Las Vegas expected to be completed and open in 2010.

The company also acquired 350 acres on the Strip, but has yet to announce plans for them.

Loveman said the ownership change hasn't altered the timetable of the company's Strip strategy and that eventually an announcement would be made.

In other Control Board business, another major acquisition was recommended for approval — a three-way deal in which Providence, R.I. -based GTECH Corp. acquired Germany -based Atronic International and both were bought by Lottomatica of Rome for $4.8 billion.

The board also recommended approval of the conversion of MGM Mirage holding companies for its Jean holdings into limited-liability companies for tax purposes and the licensing of Brian Greenspun as a manager for Fiesta Palms LLC, which operates the Palms, and G.C. Gaming LLC, half owner of Barley's, the Greens Cafe and Renata's Supper Club.

The Greenspun family owns In Business Las Vegas.

The licensing enables Greenspun to serve on corporate boards, and he won't be involved with the day-to-day operations of the casinos.