I never thought it'd be this easy.
Back in July, when Harrah's Entertainment (NYSE: HET) and Caesars Entertainment (NYSE: CZR) announced their intent to merge and create the world's largest casino operator, it was apparent that the companies would have to sell off several properties in various markets to ease trade concerns (see No Quick Win in Casino Merger). The two companies confirmed Tuesday that they are in discussions with an affiliate of Los Angeles-based investment firm Colony Capital to sell four properties for an estimated $1.3 billion.
The potential deal involves Harrah's Tunica and Caesars' Bally's Tunica in the Tunica, Miss., market, Harrah's East Chicago, and Caesars' Atlantic City Hilton. At first glance, Harrah's and Caesars look to be getting premium value for subpremium assets at a hefty 8.5 times EBITDA -- and all in one shot.
A month ago, we discussed these markets in a conversation involving a smaller competitor. In Tunica, we suggested that the best-case scenario for Harrah's would be to sell its Harrah's-branded property on the far end of the market, sell Bally's, and perhaps eventually re-brand Caesars' Sheraton Tunica -- optimally located next to Harrah's recently acquired Horseshoe Tunica and Mandalay Resort Group's (NYSE: MBG) Gold Strike Tunica -- to the Harrah's brand. While it's possible -- though seemingly unlikely -- that the Sheraton Tunica is on the market, this appears to be what will happen.
And it's not surprising that Harrah's would prefer to sell to a private buyer rather than a smaller rival such as Argosy Gaming (NYSE: AGY); what's surprising is that the private buyer is most likely offering the best deal.
Colony's strategy is curious. The investment firm looks to be paying up for Harrah's East Chicago. That property is clearly the highest-quality asset in the deal, though still a second-best player in the Chicagoland market. Colony must also see redevelopment value in the Atlantic City Hilton, and it must believe that the mess that is Bally's Tunica -- in what in my opinion may be a viable location -- is salvageable. If that's the case, then the reported EBITDA figures understate those properties' values.
On the other hand, Harrah's Tunica is a noncompetitor with a poor location.
Another name mentioned as a potential bidder is Penn National Gaming (Nasdaq: PENN), though it's not clear to me which parts that company is interested in. Penn owns the Hollywood Tunica next door to Harrah's, so I can't see it wanting to compound its problems. I also tend to think of Penn as more of a value player, which may take it out of play for a high-priced Harrah's East Chicago.
Colony Capital is a somewhat familiar partner -- it purchased the Las Vegas Hilton (see Streamlining Park Place) from Caesars for $280 million late last year. But if such a deal goes through on these terms, Colony could also be letting Harrah's and Caesars off easy by paying premium dollars for a second-best player (Harrah's East Chicago), a noncompetitor in Harrah's Tunica, a noncore asset (Atlantic City Hilton), and a mess (Bally's Tunica).
Fool contributor Jeff Hwang owns none of the companies mentioned above.
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