Harrah's Gains, Gamers Lose

Jack Binion just poked a hole in the heart of every card player from Illinois to Texas.

Harrah's Entertainment (NYSE: HET  ) is set to acquire Jack Binion's Horseshoe Gaming for $1.45 billion, including $917 million in cash. Horseshoe, the largest privately held gaming company in the U.S., owns market-leading properties in the Chicagoland, Ill./Ind.; Tunica, Miss.; and Shreveport, La. gaming markets.

This latest move comes as a surprise. On August 1, the Las Vegas Review-Journalreported that Las Vegas-based riverboat casino operator Ameristar Casinos (Nasdaq: ASCA  ) had made an unsolicited $1.39 billion offer for Horseshoe. Until just a couple of days ago, all indications were that Ameristar was the sole bidder for all three properties.

This is a big deal. Acquiring Horseshoe's roughly $850 million in annual revenues would have made Ameristar the fifth-largest casino operator in the country. More importantly, the three Horseshoe properties would have given Ameristar the dominant position in five of the seven, and seven of the 10 largest new jurisdiction markets, making it the premium player in riverboat gaming.

Harrah's, with properties in each of Horseshoe's markets, has card players jittery. The fear: that it will keep the Horseshoe-branded casinos but ditch the Horseshoe style of gaming and, ultimately, the high-stakes gamblers that come with it.

The Competitive Landscape

  Market                  Revenues*   In Market    Market Leader
Chicagoland, Ill./Ind. $2.3B 9 Grand Victoria (MBG)**Tunica, Miss. $1.2B 9 HorseshoeMississippi Gulf Coast $1.1B 12 Beau Rivage (MGG)St. Louis, Mo. $826M 5 Ameristar (ASCA)Shreveport, La. $821M 6 HorseshoeCincinnati, Ohio $656M 3 Argosy (AGY)Kansas City, Mo. $611M 4 Ameristar (ASCA)
*Twelve months ended June 2003
**Horseshoe is best positioned

Harrah's can't lose
This is a great deal for Harrah's. The company has spent the past several years getting picked apart by Ameristar and Horseshoe in the markets they share.

Moreover, at $1.45 billion, Harrah's is paying a reasonable 7.2 times expected 2004 EBITDA to eliminate three of those thorns while acquiring the high stakes brand in the industry. In one fell swoop, Harrah's eliminates its strongest competition and becomes the market leader in Chicago, Tunica, and Shreveport-Bossier City. The company plans to build new casinos and re-brand some of its existing properties with the Horseshoe brand.

In addition, Harrah's also blocks Ameristar's home-run shot at becoming the biggest player in riverboat gaming, while at the same time fighting off its destiny as a second-best player in virtually every riverboat market.

So regardless of what I'm going to say next, Harrah's can't lose here.

The Horseshoe brand of gaming is at risk
The Horseshoe concept is simple: Offer a fair game, feed your guests, and they will come back. Jack Binion's gets all the big bettors by resting its business on these pillars:

  1. Fair game. Horseshoe Tunica has the only mostly single-deck blackjack pit outside of Nevada, and Horseshoe Bossier City offers one of only two blackjack games in the country that can be beaten with a basic strategy card.

  2. Everyone eats for free, as floormen can comp the buffet and steakhouse to non-rated players.

  3. And they don't sweat heavy action -- you won't find another casino operator in the Midwest or the South that has a $10,000-per-hand maximum bet at its tables.

This is where attitudes collide. Jack Binion wants you to win so you'll come back. Harrah's is a slot brand, a company that would do away with table games entirely if it could get away with it. It's of little solace that Jack Binion has agreed to advise the integration of the company and the expansion of the brand, because he will probably have little control over the game.

So the fair game will probably go. About half of Harrah's properties are littered with Continuous Shuffling Machine (CSM) Blackjack games, which is basically a slot machine on a table. It is designed so that it can't be beaten by card counters, but it also chases away big bettors. With that attitude, expect the single-deck games to go.

The Binion staple, "Everyone eats for free," will also go. The Horseshoe properties are to be integrated into Harrah's Total Rewards 2 program, which offers significantly reduced comp power -- particularly for table games players.

I can't speak for the action, but the point is this: If the fair game is gone and "Everybody eats free" is gone, do you think the big money players will be gone, too?

So, what happens now?
With or without the big bettors, here's Harrah's game as I see it:

Chicagoland, Ill./Ind., $2.3 billion market
With Horseshoe Hammond, Harrah's now owns three of the top four revenue-grossing properties in the Chicagoland market -- the third-largest gaming jurisdiction in the country.

The Horseshoe property is on the Indiana side of the market and is the closest property to The Loop. With the 1,200-position limit and extreme tax rates currently imposed on Illinois casinos, the Indiana-side casinos are cashing in.

MGM Mirage (NYSE: MGG  ) wants in on the market, and, for some reason, Park Place (NYSE: PPE  ) wants in on the Illinois side. Harrah's owns the top two properties on the Indiana side, the Horseshoe being the best positioned.

It'll be interesting to see how the Indiana Gaming Commission and the other casino operators react. Indiana passed a provision allowing casino operators to own more than one property in Indiana last year, though I'm not sure this is what they had in mind.

Chicagoland Market Gaming Revenues

  
Indiana Casinos FY'01* FY'02*7/03 Horseshoe Hammond (HET) $278.9M $339.6M $29.9MHarrah's E. Chicago (HET) 272.1M 289.9M 26.1M Blue Chip (BYD) 193.5M 218.2M 19.2MMajestic Star 122.6M 142.9M 11.1MTrump (DJT) 125.7M 127.0M 11.2M Total Indiana Share 44.4% 48.1% 51.1% Illinois Casinos FY'01* FY'02*7/03Grand Victoria (MBG) $421.7M $383.2M 31.8M Harrah's Joliet (HET) 318.2M 305.0M 22.4MEmpress Joliet (AGY) 250.5M 237.3M 21.4MHollywood Aurora (PENN) 250.6M 280.4M 17.6MTotal Illinois Share 55.6% 51.9% 48.9%Total Chicagoland Market 2.23B 2.32B

*Ill. FY'02 ended June 30, 2003

Tunica, Miss., $1.2 billion market
Tunica, the Gaming Mecca of the South, is about 30 miles outside Memphis. It is the third-largest gaming destination in the country. There are really only three players in the market: Horseshoe, Grand Tunica (PPE), and Gold Strike (MBG). The rest of the competitors rake in low minimum table play and slot play.

Park Place's Grand Tunica is a destination resort that stands alone on a property closest in proximity to Memphis. Horseshoe Tunica was No. 1 last year, drawing $303 million in revenues from its 65,000 sq. ft. casino (about half the size of Grand). The property features a nifty blues museum and one of the best buffets I've ever had (several times a day). It shares the strongest cluster with Mandalay Bay's (NYSE: MBG  ) Gold Strike and Sheraton (PPE), a locals joint.

Harrah's currently owns a small property in the cluster farthest away from Memphis, next to Penn National's (Nasdaq: PENN  ) No. 4 player Hollywood Tunica, and Boyd Gaming's (NYSE: BYD  ) classic but poor-performing Sam's Town.

But here's the thing: Horeseshoe is No. 1 because of the great game and great free food. It gets higher-stakes players in less floor space than Grand. Grand has single-deck blackjack, though not with the same classic appeal as the Horseshoe brand. If the style of play goes, so will much of the excess revenue -- to Grand Tunica and Gold Strike.

Shreveport, La., $821 million market
The Shreveport-Bossier City market gets big bettors from the Dallas, Texas, area, about four hours away. The casinos are all pretty similar in composition, as they are limited to 30,000 sq. ft. of gaming space. This means that the differentiating factor in revenues is the betting of the players.

Horseshoe Bossier-City is the largest gaming revenue grosser in the state of Louisiana, with $256.4 million this past year. Its property features a 606 all-suite hotel.

Harrah's already owns two of the six properties in the market, including the Louisiana Downs racetrack, which opened May 21 this year. To avoid antitrust issues, Harrah's plans to sell its Harrah's Shreveport property.

Shreveport-Bossier City Market Gaming Revenues

                                FY'02*     ShareHorseshoe Bossier City (HET)   $256.4M    31.2%Harrah's Shreveport (HET)      $180.2M    22.0%Hollywood Shreveport (PENN)    $143.2M    17.4%Isle of Capri Bossier (ISLE)   $118.5M    14.4%Boomtown Bossier (PNK)         $115.4M    14.1%Harrah's LA Downs (HET)        $7.2M**     0.9%
*FY ending June 30, 2003
**opened May 21, 2003

End game
Harrah's can't lose here because it eliminated a competitor and gained a brand at a low premium. It blocked a second competitor from obtaining instant stardom, while gaining stronger positioning in three important markets. But the bottom line is that Harrah's will not and cannot maintain the Horseshoe style of gaming, which will hurt the brand. So, Harrah's doesn't necessarily gain much in monetary value here, either.

More importantly, there are a couple of losers here: Ameristar Casinos misses out on an opportunity, and gamblers lose one of the good things left in the gaming industry.

Jeff Hwang owns shares of Ameristar Casinos. The Motley Fool is investors writing for investors.


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