Is it time to roll the dice on an initial public offering by Harrah's Entertainment, the world's largest casino operator, which has been struggling with reduced revenue and hefty debt since it went private via a leveraged buyout in early 2008?
There are compelling reasons to suggest an IPO -- or more likely a spinoff of some casino properties -- might make sense. To buy into this idea, look at the recent trends in casino financing, evolving strategies among private-equity companies, and improved market receptiveness to IPOs.
Yes, a Harrah's deal would be complex, and the U.S. casino market remains a source of anxiety for operators, equity investors, and bondholders. A spinoff could give the company extra cash to ease its debt burden and make it more nimble.
Of course, a spinoff won't alter Harrah's acquisition ambitions. The company recently told Nevada casino regulators that it wants to buy the troubled Planet Hollywood Resort & Casino on the Las Vegas Strip.
Revival time for IPOs
Las Vegas Sands
In the U.S., the IPO market is looking better. Through Dec.15, there were more deals (60) in 2009 than for all of last year (43), according to the IPO research firm Renaissance Capital. However, don't forget that this year pales in comparison to the 2004-2007 period, when each year yielded more than 200 IPOs.
Meanwhile, private-equity firms such as Kohlberg Kravis Roberts and Cerberus Capital Management have launched IPOs in recent months or have filed to take some of their holdings public.
Reports by the Financial Times and Reuters in October said Blackstone Group
And how's this for confidence in the IPO market? Last month, Apollo Global Management dusted off its plans to go public with an amended filing with the Securities and Exchange Commission. Apollo and fellow private-equity firm TPG Capital took Harrah's private back in early 2008.
As The Motley Fool pointed out recently, spinoffs can be attractive to shareholders as well as to companies that want to raise cash quickly and/or sharpen their strategic focus.
A corporation can spin off a division completely, or it can use the equity carve-out, or partial spinoff. A good example of the latter is what Bristol-Myers Squibb
The coal industry also offers insight into how a spinoff can achieve financial, share price, and strategic objectives. At first glance, there doesn't appear to be a link between coal mines and casinos -- the former relies on canaries, the latter caters to pigeons -- but check out Peabody Energy's spinoff of Patriot Coal in October 2007.
Peabody is the world's largest coal company, but it spun off its Appalachian state holdings to create Patriot. Peabody wanted to focus more on mining in Australia and the western U.S., saying Appalachian coal didn't fit its future goals.
The same might be said for Harrah's Entertainment if it decides to shed some properties whose locations, financial returns, and/or gambling trends don't match Harrah's long-term goals. Putting these properties in a smaller company might make strategic sense.
Bigger doesn't mean better
Harrah's owns or manages 52 properties in six countries. It has more casinos than the combined total of Wynn Resorts, Las Vegas Sands, MGM Mirage
For the quarter ended Sept. 30, it had $19.3 billion in long-term debt and a shareholder's deficit of $1.08 billion. At the end of last year, long-term debt stood at of $23.1 billion and the shareholder deficit was $1.36 billion.
The recession continues to punish operations. For the three months ended Sept. 30, revenue fell to $2.28 billion, from $2.65 billion in the year-ago quarter. Hit by $1.33 billion in charges for impairments of goodwill and intangible assets, Harrah's had a third-quarter operating loss of $1.05 billion. For the same period last year, it had an operating profit of $349.6 million.
Spin the IPO wheel
If you buy my idea that a spinoff might work, the next question is what properties would be spinnable? Solid, smaller, slower-growing casinos might fit the bill. Beware of how much debt is assigned to a spinoff.
We won't pick individual casinos; but if you want to play dealmaker, check Harrah's latest 10-Q for financial data on six broad geographic categories ranging from the Las Vegas Strip to Atlantic City to portions of the Midwest and South. You may conclude that, at last for Harrah's, the odds favor a spinoff.