Street seen as reassured about Harrah's-Caesars deal

Sales prices for out-of-state casinos help renew
investor faith in merger, observers say

October 09, 2004 - Strong arguments by Harrah's executives have helped persuade Wall Street that its $9.4 billion plan to buy Caesars Entertainment makes strategic sense, analysts said Friday.

After the deal was announced July 14, uncertainty about the merger drove Harrah's stock price to $44.29 a month later, down 15 percent from its preannouncement close of $51.98 a share and down 21 percent from its $56 per share high for the year set in April.

By Friday, however, shares in Harrah's had finally fully recovered, closing at $54.09 a share, up 8 cents, or 0.15 percent, on 1.7 million shares, double the normal trading volume.

Susquehanna Financial Group gaming analyst Eric Hausler said Harrah's has also benefited from the recent surge in demand for gaming stocks, but the company's message nevertheless has been resonating with investors.

The Dow Jones casino index closed Friday at 410.93, up 14 percent from the middle of August, when the recovery in Harrah's and other gaming stocks started. By comparison, the Standard and Poor's 500 Index closed Friday at 1,122.14, up less than 6 percent over the same period.

Joe Greff, gaming analyst at Fulcrum Global Partners, an independent Wall Street investment research firm, said the biggest factor in Wall Street's renewed interest came from Harrah's deal to sell Colony Capital four properties: Harrah's East Chicago, Harrah's Tunica (Miss.), Atlantic City Hilton and Bally's Tunica (Miss.) for $1.2 billion.

"Harrah's and Caesars are selling the four properties to Colony for a much larger multiple (of cash flow) than the Street expected," he said. "That reflects the value private equity is placing on gaming properties, but it also makes the sale of Caesars a much better deal (for Harrah's)."

However, he and Hausler also said since the initial shock from the announcement of a deal big enough to create the largest company in gaming industry history, Harrah's executives have successfully presented their case for the merger.

Presenting the same pro-merger case at Global Gaming Expo that he has made in Wall Street boardrooms, Harrah's Chief Financial Officer Chuck Atwood said three key elements in the Caesars merger will prove to be strategically important. He described those as bolstering his company's customer loyalty program, decreasing the company's dependence on high-tax states and completing Caesars Entertainment's major capital expenditure program.

Thanks to Harrah's customer loyalty programs, revenues in existing casinos have increased more than 5 percent so far in 2004, compared with less than 2 percent in 2003, Atwood said.

With the larger distribution network Caesars will bring to the table, such same-store growth should accelerate after the merger, enhancing Harrah's long-term growth profile, he said.

Brian Gordon, spokesman for Applied Analysis, a Las Vegas-based financial consulting firm, said Harrah's will be able to expand what is already one of the industry's leading customer loyalty programs to one of the strongest brands in gaming with Caesars.

The merger will also increase Harrah's dependence on Nevada, New Jersey and Mississippi, so that it will get almost three-quarters of its cash from from those three states compared with slightly more than 50 percent before the merger.

Harrah's President Gary Loveman at G2E repeatedly said a key to the merger is it will focus company growth on those three states because their tax structures and regulatory environments are far more stable than other states such as Illinois.

University of Nevada, Las Vegas professor Bill Thompson, who specializes in gaming studies, said that strategy has already been adopted by competitors such as MGM Mirage. He added that it makes good sense because Las Vegas is where the bulk of gaming industry development is likely to occur in the next several years.

"The gaming tax and regulatory environments are unstable in other casino states like Illinois, Michigan and Indiana and they're likely to stay that way," he said.

Atwood said in Las Vegas, completion of the Roman Plaza at Caesars Palace in July, the expansion of the Forum Shops opening this month and the 949-room tower set to open next summer should boost earnings.

Also nearing completion are investments in a new parking garage and the Pier at Caesars in Atlantic City, both set to open in mid-2005 and each likely to further boost earnings.

By 2006, the new Harrah's that will exist after the merger will reap the benefits of the investments Caesars has been making in its properties, Greff said.

Thompson added that Harrah's faces a tough challenge in merging corporate cultures and changing basic strategy.

"What Loveman said this week about every American having the right to gamble sounds like reverting to their old argument of having casinos in such faraway places as Carruthersville (in southeast Missouri). It's a little inconsistent," Thompson said.

Harrah's spokesman Gary Thompson said Loveman was in Atlantic City and could not be reached to comment on Harrah's merger strategy.

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Article ©: R. Smith, Gaming Wire, LVRJ