Harrah’s, Caesars ink deal

By Liz Benston

Thursday, July 15, 2004 | 11:20 a.m.

The boards of Harrah's Entertainment Inc. and Caesars Entertainment Inc. agreed to a megadeal Wednesday night in which Harrah's would buy Caesars for about $9.4 billion, including the assumption of about $4.2 billion in debt.

The deal, which dwarfs last month's $7.9 billion agreement by MGM MIRAGE to buy Mandalay Resort Group, would create the world's largest casino company with more than 50 casinos and more than 41,000 hotel rooms as well as about 100,000 employees.

Harrah's agreed to pay about $17 per share for Caesars in stock and cash. That portion of the deal is valued at about $5.28 billion. The deal, expected to close in about a year, still requires approvals by Harrah's and Caesars shareholders as well as gaming regulators.

Caesars shareholders would receive $1.8 billion in cash and 66.3 million shares of Harrah's common stock. Caesars stockholders will be able to elect to receive solely shares of Harrah's stock or cash, to the extent available, officials said.

Harrah's stock fell more than $3 per share or around 6 percent to $47.84 in early trading today. Caesars shares fell less than $1 per or about 5 percent to $15.14. Caesars stock jumped $2.08, or $14.9 percent, in Wednesday trading on reports of a potential deal. It closed at $16. Harrah's fell $1, or 1.9 percent, to $50.98.

This morning, bond rating agencies Standard & Poor's and Moody's Investors Service affirmed the company's investment-grade corporate credit ratings.

Harrah's is the only major casino company with an investment-grade bond rating. Ratings below investment grade are commonly known as "junk bonds."

The deal raises a host of issues nationwide about whether the combined entity would be forced to sell overlapping casino properties to appease state and federal regulators. Regulators in several states declined to comment on how they would rule, saying they haven't reviewed details of the purchase yet.

The exception is Indiana, where state regulators said today the entity would have to sell one of its three casinos to meet rules prohibiting operators from owning more than two casinos.

Besides a sale in Indiana, Harrah's Chief Executive Officer Gary Loveman said today the company would likely sell assets in Tunica and perhaps Lake Tahoe, where the company would control five and four casinos, respectively, and a majority share of the market.

Other areas of concentration, such as Las Vegas and Atlantic City, might not require asset sales, Loveman said. The combined company would have seven and five casinos in each region, respectively.

Prior to the legalization of slots in Pennsylvania and the opening of the luxury Borgata resort in Atlantic City, one company controlled four casino licenses in the New Jersey resort town, he said.

"I don't believe it's unreasonable that there could be (one company) with five licenses," Loveman said.

New Jersey Casino Control Commission Chair Linda Kassekert said five casinos "does sound like a lot" but that it might still pass muster once the state's economic concentration criteria are applied. The state used to limit operators to three casinos but in 1995 changed regulations to apply broader set of factors such as the number of hotel rooms, slots and tables a company owns.

"It's hard to tell because we don't have anything in front of us yet," Kassekert said. "We're kind of talking with blinders on because we don't have specifics."

Mississippi, where the company would own five casinos in Tunica, has even broader standards.

"There aren't specific regulations in the Gaming Control Act regarding antitrust issues or competitive issues but our regulations are broad enough that we do have the right to step in and take action if necessary and if we felt there was a serious antitrust issue," Mississippi Gaming Commission spokeswoman Leigh Ann Wilkins said.

Louisiana regulators could not be reached for comment today but the Times-Picayune newspaper in New Orleans reported that a noncompete clause in Harrah's New Orleans Casino's lease with the city says that the operator of the land-based Harrah's casino cannot operate another land-based casino within 200 miles of New Orleans. That means either the New Orleans land casino or some of the Mississippi properties may need to be sold.

In addition, analysts have speculated that Caesars would eventually sell its underperforming Bally's Casino riverboat in New Orleans.

The deal has puzzled some analysts who say Harrah's will be buying several underperforming assets in scattered markets and that Caesars' casinos are more upscale with a different culture than its own.

But Loveman insisted the company is buying assets that are in many ways similar but aren't as well managed because they lack sophisticated technology to fill hotel rooms and market to slot customers -- two strategies that have driven earnings at Harrah's.

Harrah's has been interested in expanding in Las Vegas and Atlantic City for some time because of growth prospects and stable regulatory environments there, Loveman said. Harrah's also is interested in Mississippi for the same reasons, he said.

"These are the right assets for the development of our strategy," Loveman said. "Second, we believe these assets are worth more in our hands than in our incumbent's hands and third, we believe we've acquired them at a reasonable price."

Harrah's spokesman said there would be layoffs but the company hasn't determined how many. The combined entity is expected to save about $80 million, primarily in operating costs related to consolidating back-office operations and duplicate departments, in its first full year, company officials said. That number is expected to rise significantly in future years.

The company is expected to hold off on previously announced plans to build a major Horseshoe-brand resort on the Las Vegas Strip in order to focus on integrating acquired properties, Loveman said. He also hinted at a potential site for that resort in the future. Caesars' Bally's casino, located at the heart of the Las Vegas Strip and the combined entity's casinos, will eventually become a "very desirable redevelopment site," he said.

Harrah's also is expected to eliminate several brands acquired with the Caesars merger, retaining the Harrah's, Horseshoe, Caesars and Rio names, Loveman said.

Prior to approval of the deal Wednesday, analysts buzzed about the potential for growing antitrust concerns if federal regulators end up weighing in on not one but two megamergers in the gaming industry.

When MGM MIRAGE agreed to buy Mandalay Resort Group last month, some analysts speculated that the deal would still pass muster because the companies would have the greatest market concentration in Las Vegas, which competes with other tourist destinations worldwide and still has significant competition on and off the Strip.

But news that Harrah's could buy Caesars could throw a wrench in the scenario by reducing the number of potential competitors in Las Vegas, experts say. The potential Harrah's-Caesars combination would create a more geographically diverse company with casinos in more than 12 states and others abroad, raising potentially more antitrust issues in smaller, regional markets where their casinos overlap and drawing attention to the casino industry as a whole, they say.

Antitrust experts say the two potential megadeals bear some resemblance to a pair of planned mergers in the soft drink industry in the 1980s.

Shortly after Coca-Cola proposed acquiring Dr. Pepper, competitor Pepsi announced plans to buy 7-Up in a tactical move widely seen as a way to thwart the Coke merger.

The Federal Trade Commission in 1986 forestalled both mergers, arguing that they would have created too much market concentration.

A somewhat more subtle move was made by two pharmaceutical companies that each proposed mergers in the late 1980s and decided to have their two FTC cases tried in the same proceeding, said Warren Grimes, a professor of antitrust law at Southwestern University Law School in Georgetown, Texas, and a former Federal Trade Commission attorney.

"That might have saved them a bit in legal costs but I think the major reason was that they didn't want to see the other acquisition go through without one of their own," Grimes said. "They wanted all or nothing."

The Federal Trade Commission would no doubt closely examine both deals individually but having two potential mergers might mean tougher scrutiny, said Steve Newborn, former head of merger enforcement at the FTC and an attorney for a global merger and antitrust firm in New York.

"It creates a lot more noise in that area in terms of people talking to the FTC or the Justice Department," Newborn said. "That might make them look closer."

Having one fewer competitor in Las Vegas also could increase market concentration in hotel rooms and casino space, he said.

But David Leonard, a former Justice Department lawyer and now a Los Angeles-based attorney, said more mergers on the horizon probably won't make a difference to regulators.

That's because it will still be difficult for federal officials to figure out market concentration data in a complex market like Las Vegas, with casino games, hotel rooms, entertainment and restaurants to take into account, he said.

Prices for consumers won't necessarily go up if the Las Vegas Strip is consolidated, Leonard said.

"The issue boils down to what consumers will have to pay once this consolidation goes through," he said. Smaller markets such as Atlantic City have fewer hotel rooms and therefore might face some price problems, however, he said.

Marc Schildkraut, a Washington, D.C.-based antitrust attorney and former assistant director of the FTC's Bureau of Competition, said the potential deals could pass muster if the agency determines that customers would simply go to competitors or other places if the companies raised prices.

Smaller markets such as Lake Tahoe, where the companies would control a greater share of hotel rooms and gambling in the region than Las Vegas, may prove more challenging for regulators, however, he said.

"Everyone who comes to the FTC says their industry is different and merger guidelines shouldn't apply," Newborn said. "But the guidelines have proven to be extraordinarily elastic to measure market concentration in every industry. Every industry has its own idiosyncracy and nobody gets a free pass from federal antitrust laws."

Nevada regulators also are bracing for their own investigations.

State Gaming Control Board Chairman Dennis Neilander said he was surprised when he heard the news of the prospective merger but said it's not uncommon for casino companies "to go out and kick the tires" of other properties after a major deal is announced.

Neilander said the proposed MGM MIRAGE-Mandalay Resort Group deal could affect any marriage between Harrah's and Caesars because regulators would examine the existing competitive environment, which could be altered if the MGM MIRAGE-Mandalay matter is wrapped up.

But he added that a Harrah's-Caesars blending would be evaluated on its own merits based on Nevada's Regulation 3.070. That regulation addresses multiple licensing and whether proposed acquisitions would affect the market share for total numbers of slot machines, table games, gross revenue, rooms available, employees hired and total payroll.

Regulators also would examine effects on suppliers and employees, and whether the acquisition would pose problems or create a monopoly, Neilander said.

While the latest news gives them pause, some consumer advocates say tourists shouldn't worry about a future with fewer choices or higher prices.

"I think the consumer can get better service with a big company," said UNLV professor Bill Thompson. "I don't see this as a vehicle to hurt the consumer, I see it as a vehicle to help the consumer and give them a better deal."

Similarly, Wal-Mart uses pricing power to offer low prices, which ends up hurting competitors rather than customers.

"The question is whether (casinos) like the Sahara and the Riviera can find a niche in this milieu," Thompson said. "They can if the two big companies do not engage in predatory practices."