Harrah's Offer Raises Questions

News that two private equity firms with no experience in the gaming industry have made a $15 billion offer to acquire the world’s largest gaming company has fueled vast speculation about whether other gaming companies will be snapped up by private investors.

But many bigger questions remain unanswered about the offer, including how amenable Harrah’s is to a takeover, what the buyers’ plans are for the company and how regulators across the country will weigh in on the historic deal.

In a two-paragraph press release Monday, Harrah’s disclosed that Apollo Management and Texas Pacific Group have made an offer to acquire all of the company’s common stock for $81 per share in cash.

The company’s board has appointed a special committee of nonmanagement directors and has retained independent financial and legal advisers to review the offer. Harrah’s said it has no assurance that it will agree to the deal.

Private equity firms worldwide have accumulated record sums of cash but have difficulty finding attractive sectors that can generate bigger returns on their money than public companies typically achieve.

The gaming industry is attractive because it generates large, relatively stable cash flows, analysts say. They expect the firms to increase their offer for Harrah’s based on its growth prospects in Las Vegas, Atlantic City and Europe, where the company has various projects underway.

Nevada law doesn’t prevent hostile takeovers but requires entities to be licensed before they can acquire Nevada gaming companies.

Many non-Nevada companies have been reluctant to take that step because it required that shareholders submit to the same, thorough background checks that casino executives have been subjected to for years.

When Colony Capital acquired Harveys Casino Resorts in the late 1990s, the company created a new investment structure that helped pave the way for other private equity firms who might have previously been reluctant to invest in the casino business. Harveys was split into two classes of stock, one with voting rights and another with no voting rights. Nevada regulators required the principals owning voting rights to submit to thorough background checks based on the premise that they control the company’s operations. The other shareholders, who only had economic rights in the company, received a cursory review but weren’t similarly investigated.

Colony used a similar structure to acquire the Las Vegas Hilton from Caesars Entertainment. The method appeals to private equity companies with hundreds of potential investors who often have lengthy and complex financial histories.

The Harrah’s offer would be the biggest transaction in the history of the gaming industry and one of the nation’s largest by a private equity firm.

Liz Benston covers gaming for In Business Las Vegas and its sister publication, the Las Vegas Sun. She can be reached at [phone] or by e-mail at benston@ lasvegassun.com.