$25 Billion Buyout Offer for Harrah's No Good

In a stunning piece of news, casino giant Harrah's Entertainment (NYSE: HET  ) announced Monday morning that it had received a proposal from private equity firms Apollo Management and Texas Pacific Group to acquire the company for $81 per share, representing a 22% premium to Harrah's price of $66.42 at last Friday's close. At $15 billion -- or more than $25 billion, including long-term debt -- a potential leveraged buyout would be the largest transaction for a casino firm yet, and would also represent the largest venture into the casino business by private equity concerns. The news sent Harrah's shares up 14%, and also gave a boost to shares of other casino operators, including MGM Mirage (NYSE: MGM  ) , Station Casinos (NYSE: STN  ) , and Ameristar Casinos (Nasdaq: ASCA  ) .

Let me start by saying that a potential deal makes little sense for either Harrah's shareholders or the company in general. It merely confirms my belief that Harrah's shares were undervalued.

Harrah's is a company that has tremendous long-term potential, and it has only just begun realizing the value of the assets acquired in last year's merger with Caesars Entertainment. Investors are still anxiously awaiting announcements regarding master plans for the Las Vegas Strip and Atlantic City -- two markets which now account for 60% of the company's cash flow. In fact, this morning Harrah's separately announced an agreement to swap 24 acres of land adjacent to Boyd Gaming's (NYSE: BYD  ) Stardust property on the Strip in exchange for Boyd's Barbary Coast -- the key piece of land on the Strip that should allow Harrah's to move forward with its plans.

Selling out now for what is probably little more than fair value would deny investors the benefits of Harrah's bright future. Moreover, the company itself has strong direction; merely folding the company's assets into those of a private equity concern for the casinos' cash flow might slow down the company's development. An increased debt load might also be a burden; where Harrah's was previously the only casino operator with investment-grade debt, S&P today downgraded Harrah's debt to junk status, based on the buyout proposal. In addition, licensing could be a potential concern. Privately held Columbia Sussex recently bailed on the acquisition of what is now Pinnacle Entertainment's (NYSE: PNK  ) President Casino in St. Louis because of an inability to gain approval for a gaming license in Missouri.

Simply put, at $81 per share, I don't think the buyout offer is compelling enough to warrant selling out.

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Fool contributor Jeff Hwang owns shares of Ameristar Casinos. The Fool doesn't gamble with its disclosure policy.


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