Harrah's and Caesars in talks to sell casinos

September 1

Harrah's Entertainment Inc. and Caesars Entertainment Inc. have signed an exclusivity agreement with an affiliate of Colony Capital LLC that allows Colony to negotiate the purchase of four casinos in advance of the pending merger of Harrah's and Caesars, the companies said today.

In a joint statement, the companies said they had reached an agreement that would place some restrictions on Harrah's and Caesars for a limited period of time regarding negotiations with other parties with respect to the sale of the properties.

The potential sale would include Harrah's-owned properties in Tunica, Miss., and East Chicago, Ind., as well as Caesars' Atlantic City Hilton and Bally's riverboat casino in Tunica, the companies stated.

But, they were quick to say that the purchase isn't final.

Spokesmen for Harrah's, Caesars and Colony Capital declined further comment.

Analysts say that they aren't really surprised by the news and expected those casinos to be sold anyway. In announcing the merger with Caesars, Harrah's Chief Executive Gary Loveman had said the company -- which would own three casinos once it acquires Caesars -- would sell one of its casinos in Indiana because of a state law preventing companies from owning more than two casinos in that market. He also had said the company would likely sell casinos in Tunica, where the combined company would own five casinos and control a majority share of the market. Loveman also speculated about the possibility of selling casinos in Lake Tahoe, where the combined company would own four properties.

While Loveman had said the company wouldn't necessarily sell any properties in Atlantic City, analysts have speculated that the combined entity, which would own five of the city's 12 casinos, would be pressured by regulators to sell casinos there as well.

UBS Warburg analyst Robin Farley said the sale would be positive for Caesars because it increases the chances that the pending acquisition will pass muster from antitrust regulators who are now scrutinizing the deal.

Steve Newborn, former head of merger enforcement at the Federal Trade Commission, said it would be too early for the company to be selling these particular properties to satisfy any particular requirement from federal regulators.

In a research note today, CIBC World Markets analyst William Schmitt said the assets slated for sale are considered "non-core" and said the properties are located in the three markets in which the combined entity "would have been heavily concentrated, potentially leading to difficulties in gaining regulatory approval for the proposed merger."

Harrah's executives have said that a major goal of the merger with Caesars is to increase the company's presence on the Las Vegas Strip.

According to the terms of the agreement, Colony Capital would have approximately three weeks to close the deal, Schmitt said.

Analysts said the offer, valued at about $1.3 billion, is equal to more than eight times the properties' annual cash flow. Analysts said the offer seemed to be more than expected for the four casinos given that they aren't top-tier properties.

Farley said the offer could increase the estimated book value of the combined companies and said she had projected the properties would fetch an offer of about six times their estimated cash flow in 2005.

Los Angeles-based Colony Capital is a private equity firm that backed this year's $280 million purchase of the Las Vegas Hilton from Caesars Entertainment. Colony, which formerly owned the Harvey's casino in South Lake Tahoe, also owns Resorts International in Atlantic City and is a partner in Accor Casinos in Europe. The company focuses on real estate and has investors that include state and private company pension funds.

Fulcrum Global Partners analyst Joe Greff said Colony's interest is a sign that private investment groups are hot on the casino industry.

The emergence of private buyers willing to pay premiums for casinos might crowd out smaller operators like Argosy Gaming Co. that are looking to make such purchases, it is said.