Casino giant Harrah's Entertainment will be owned by two private equity firms in an all-cash deal worth $27.8 billion, the largest-ever transaction for a gaming company and one of the largest-ever leveraged buyouts of an American corporation.
The deal, which had been brewing since Oct. 2, was announced Tuesday afternoon after the close of trading on the New York Stock Exchange and will take Las Vegas-based Harrah's, the world's largest casino operator, private and out of the traditional public markets.
Sources said financial terms of the buyout were agreed upon in principal last week. New York-based Apollo Management and Texas Pacific Group of Fort Worth, Texas, committed to pay $90 a share to buy approximately 190 million outstanding shares of Harrah's Entertainment, or $17.1 billion. In addition, the firms will assume the company's $10.7 billion debt.
The deal would be the fifth largest leveraged buyout this year and the sixth largest of all time, according to Thomson Financial.
The private equity groups will be paying a premium of approximately 36 percent over the closing price of Harrah's shares on Sept. 29, the last trading day before the private equity group's original offer of $81 a share was disclosed. Shares of Harrah's closed Tuesday at $82.32, up 14 cents or 0.17 percent.
Gaming analyst Matthew Jacob of Majestic Research in New York summed up the deal as an industry-altering event. Investors are already speculating on the next private equity funded takeover of a casino operator.
"I think gaming industry investors are viewing this deal as (historic)," Jacob said. "Investors are looking at anything that makes a company's stock more attractive to private equity."
Dennis Farrell of Wachovia High Yield Research in Charlotte, N.C., said the transaction raises the gaming industry's valuation bar in the minds of investors. Smaller casino operators wanting to stay publicly traded, however, may be taking actions to ward off suitors.
"I don't know if this is an industry changing deal, but the valuations are rising and will continue to rise," Farrell said. "Some companies are going to get defensive, maybe even acquire smaller operators. What's clear is that if a leveraged buyout can be completed for Harrah's, then any gaming company is a target."
MGM Mirage President and Chief Financial Officer Jim Murren said the deal was the most significant transaction ever for a casino operator, topping his company's $6.7 billion buyout of Mirage Resorts in 2000 and the $7.9 billion buyout of Mandalay Resort Group last year.
"The gaming industry is so small, something this large by any industry scale is historic," Murren said. "The valuations for casino companies are going through a sea change. We paid eight times cash flow for Mirage and nine times cash flow for Mandalay. Now, gaming companies are getting 13 to 14 times cash flow."
Under terms of the transaction, the private equity groups have more than a year to finalize the deal, which needs approval from Harrah's stockholders and the endorsements of regulators in the 13 states where Harrah's operates almost 40 casinos, including Nevada.
Gaming Control Board Chairman Dennis Neilander said Tuesday it was hard to predict how long the investigative process would take, since it involves two large private equity firms that are new to Nevada.
"It's unclear the makeup of their corporate structure or how many individuals will need to be licensed," Neilander said. "We'll do what we can to accommodate any deadlines they may have."
Neilander said other recent gaming industry private equity licensing transactions took more than a year to finalize. A deal for Los Angeles-based Oaktree Capital Management to purchase one-third of Cannery Casino Resorts took more than a year to complete and involved licensing eight individuals and the company, he said.
Neilander expects other casino company private equity deals to come about, but for now, regulators need to explore each transaction on a case by case basis.
In a statement, Harrah's Chairman and Chief Executive Officer Gary Loveman said Apollo and Texas Pacific support the company's growth initiatives.
"We will have owners who share our vision for Harrah's, are fully supportive of our current strategy and are committed to helping us execute on it," Loveman said. "This will be a change in ownership, not a change in direction."
Joseph Weinert, a spokesman for industry consultant Spectrum Gaming, told CBS MarketWatch the private equity firm's backing of Harrah's initiatives were important aspects to the deal making sense.
"The key statement is Gary Loveman saying that the new owners want to continue down the path previously laid out by management," Weinert said. "This indicates that Harrah's will proceed with its major expansions planned for Las Vegas and Atlantic City. I also detect a bit of relief in that Harrah's can pursue its vision without having to worry about the quarter-to-quarter mind set of Wall Street."
The transaction was the subject of multiple lengthy meetings in New York between the Harrah's board of directors and representatives of the private equity groups both last week and Sunday. The Harrah's board voted Tuesday morning to approve the final agreement.