Please ensure Javascript is enabled for purposes of website accessibility

No Quick Win in Casino Merger

By Jeff Hwang - Updated Nov 16, 2016 at 3:57PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Caesars' shoddy operation will leave Harrah's with a mess that will take time to clean up.

So Harrah's Entertainment (NYSE:HET) is set to acquireCaesars Entertainment (NYSE:CZR) in a $9.4 billion mega-deal. The agreement has Harrah's paying about $16.96 per share, or $5.2 billion -- $1.8 billion of it in cash -- as well as the assumption of $4.2 billion in Caesars' debt. It will also create the world's largest casino operator by combining the companies' 54 casinos.

The deal has its obvious benefits. However, Caesars' shoddily inconsistent operation -- as well as both companies' control of the Atlantic City market -- will leave Harrah's with a mess that will take some time to clean up.

What Harrah's doesn't have and wants badly is a bigger presence on the Las Vegas Strip. With last month's $7.9 billion merger agreement between MGM Mirage (NYSE:MGG) and Mandalay Resort Group (NYSE:MBG) creating the dominant Strip operator, Harrah's outs are fewer. That leaves Caesars Entertainment, with such Strip properties as Caesars Palace, Paris, Bally's, and Flamingo.

Harrah's wants the bigger Strip positions because it is the most widely diversified casino operator. Basically, that means that it has the largest stable of regular customers that it can scoot to its own properties in Vegas (see Spend Your Way Into Vegas and The Logic of MGM-Mandalay). And that's exactly what Harrah's does, and does well -- the only problem is that the company's lone Strip casino attracts lower-limit gamblers compared with the more upscale resort offerings on the Strip such as The Venetian next door, Bellagio, or Mandalay Bay.

Caesars' Strip presence would correct this.

On the other hand, what Harrah's has that Caesars doesn't have is an across-the-board standard of quality. If you walk into any Harrah's property in virtually any market in the U.S., chances are you're going to walk into a casino that looks just about the same as any other Harrah's casino, with a similar quality of atmosphere. In this regard, some people refer to Harrah's as the McDonald's (NYSE:MCD) of the gaming industry, though I prefer to think of it as more of a retailer such as a Target (NYSE:TGT) or Best Buy (NYSE:BBY).

Caesars doesn't come off this way. For example, Bally's and Flamingo on the Strip feel outdated. And if you visit Tunica, Miss., you'll find that the subpar Bally's Tunica and the Sheraton have absolutely nothing in common with Harrah's pillar of class in the recently acquired Horseshoe Tunica (see Harrah's Gains, Gamers Lose), much less Caesars' Paris or Caesars Palace properties on the Vegas Strip.

With that in mind, there is a high probability that Harrah's will want to dispose of a few of Caesars' weak chips.

The other problem that would need correcting is the Atlantic City market, where a combined Harrah's and Caesars control the bulk of the market. It's likely that either Harrah's or Caesars would be forced to sell one or more properties in that market.

I think there are obvious benefits to Harrah's having access to Caesars Strip properties, but my feeling is that this is more of a one-shot act of desperation for both parties in reaction to last month's merger agreement between MGM Mirage and Mandalay Resort Group. And whatever happens -- and however the deal goes through -- it will be a long process before Harrah's has the streamlined, high-quality operation it wants.

Fool contributor Jeff Hwang owns none of the companies mentioned above.

None

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$262.18 (1.12%) $2.90
Target Corporation Stock Quote
Target Corporation
TGT
$172.48 (1.70%) $2.88
Best Buy Co., Inc. Stock Quote
Best Buy Co., Inc.
BBY
$80.30 (-0.15%) $0.12

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/14/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.