Please ensure Javascript is enabled for purposes of website accessibility

Smooth Sale for Harrah's?

By Jeff Hwang - Updated Nov 16, 2016 at 4:47PM

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

In a potential $1.3 billion deal to sell four properties, Harrah's and Caesars may get premium value for subpremium assets.

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.

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

Penn National Gaming, Inc. Stock Quote
Penn National Gaming, Inc.
$30.12 (-2.57%) $0.80

*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 service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/18/2022.

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.