Last week, my colleague Emil Lee took a shot at breaking down the value of Wynn Resorts (NASDAQ:WYNN). I got to the part where Emil assigned a value of $5 to $10 million per acre for the 142 acres of land that a golf course adjacent to Wynn Las Vegas on the Strip sits on, when it hit me:

If you're hotel-casino icon Steve Wynn, that golf course is a necessary amenity -- an essential piece of the art. But this past Spring, Aztar's (NYSE:AZR) Tropicana, just a few miles down the Strip, went for as much as $35 million an acre in a bidding war, and Aztar got eventual "winner" Columbia Entertainment to pay full value for the rest of the company in the process. And so, if you are an investor, Wynn's golf course can be seen as nothing but a waste of space.

And then we get to Harrah'sEntertainment (NYSE:HET), which, via a series of acquisitions, has amassed a site totaling 350 acres of land on or around the Las Vegas Strip. Of that, there's a stretch of land with over a mile of Strip frontage on the east side of Las Vegas Boulevard -- from Harrah's Las Vegas all the way down to Paris Las Vegas -- that is primed for a mammoth-scale redevelopment project. That area east of Center Strip amounts to about 184 acres.

The question is this: If Aztar's Tropicana site can fetch $35 million an acre from the corner of Tropicana and Las Vegas Boulevard, then how much could one conceivably get in a sale for all or parts of more than a mile of Strip frontage and more than 180 acres of associated land smack in the middle of the Strip?

Enter private equity ... at fair value?
So a couple of months ago -- as you probably know -- Harrah's received a $15 billion or $81 per share buyout offer from private equity firms Apollo Management and Texas Pacific Group. The firms have reportedly (but not confirmed) since raised the offer to $15.5 billion, which would bring the total enterprise value of the offer to $26 billion, including debt.

However, the bid likely represents little more than fair value. For Harrah's non-Las Vegas assets, if you figure that 2007 property EBITDA will be $1.7 billion to $1.8 billion, then at 8 to 9 times EBITDA, the non-Las Vegas assets are worth $13.6 billion to $16.2 billion. And Harrah's Las Vegas properties are on track to eclipse $1 billion in EBITDA this year; at 10 times EBITDA you get an eyeball fair value range of $23.6 billion to $27.2 billion, or roughly on par with the bid.

Breaking up the Strip?
Not only does this price not offer a compelling reason for Harrah's to sell vs. build out the Strip, but it does not appear cheap enough to compel an investor with no strategic interest in the company to want to buy it just to operate as is, because:

1. Harrah's does not represent a pure value play at these prices.

2. There's nothing wrong with Harrah's. In fact, through the power of its Total Rewards players program, Harrah's is maximizing value at the Strip properties acquired in last year's merger with Caesars Entertainment, while improving the value of every property in its industry-best nationwide network of casinos.

3. It doesn't make much sense for a non-operator to come in and pay fair value for Harrah's just to spend billions of dollars more to develop the Strip project. Consider that construction costs are reportedly on the rise, construction workers in Las Vegas are scarce, and the project itself is a massive undertaking.

And so, for Apollo Management and Texas Pacific Group to get value out of Harrah's, the more likely plan would be to sell anything in the organization that is ripe for redevelopment. That means any casino property whose location has untapped value -- starting with the Strip.

Sale opportunities: The Strip and beyond
 The Strip could be cut up in any number of ways. For example, the firm could sell Bally's and Paris Las Vegas as a block, which regional players such as Pinnacle Entertainment (NYSE:PNK), Ameristar Casinos (NASDAQ:ASCA), and perhaps Penn National Gaming (NASDAQ:PENN) would almost certainly be interested in; both Pinnacle and Ameristar were involved in the bidding war over Aztar, and Penn reportedly may have an interest in putting in a bid for Harrah's (however unlikely that may be). And perhaps Las Vegas Sands (NYSE:LVS) would want the block from Barbary Coast up to Harrah's Las Vegas -- which happens to be right next door to Las Vegas Sands' Venetian -- so that it can replicate the Cotai Strip.

And the sales wouldn't stop at the Strip. Other properties that could go include:

  • Grand Casino Biloxi, a potential $1 billion redevelopment project which Harrah's has completely shelved, could rake in a jackpot price compared to its earnings power in its current state.
  • Horseshoe Hammond in Chicagoland -- a property at which Harrah's is spending $500 million to build a new gaming barge to replace the awkward and undersized yacht (or oversized yacht, undersized gaming facility) that operates there.
  • Harrah's Council Bluffs, rendered irrelevant to the company with the introduction of the Horseshoe branded product at its racino just a few blocks down, is a sure goner, with any number of interested buyers dying to replace the outdated riverboat.
  • Sheraton Tunica, another property that I think would have value in a scrap-and-rebuild, thanks to its extremely attractive location adjacent to the market-leading Horseshoe.
  • The Atlantic City properties are probably good enough to keep as is, but I wouldn't be shocked to see the boardwalk properties -- Caesars and Bally's -- dangled to prospective buyers, which might include Ameristar, Penn, Wynn Resorts, or Las Vegas Sands.

The gist of it is that there are a number of properties in Harrah's system that the company would never sell itself, but which could garner above-average multiples to EBITDA in a sale. And if the private equity firms are content to pay fair value for Harrah's based on its current operations, my guess is that a breakup must figure into their strategy.

Most likely outcome: Status quo
The interesting thing about this whole episode is that it appears that Harrah's management has set itself up for the buyout. They haven't said "No"; they set up a special committee to assess the offer; they've pulled out of the running for Singapore's second casino resort; and the announcement of plans for every major redevelopment project has been put off -- including the Las Vegas Strip, Atlantic City boardwalk, and Grand Casino Biloxi. In contrast to Station Casinos (NYSE:STN) -- whose management announced Monday its intention to take the company private for $4.7 billion in cash plus the assumption of debt -- the impression I get is that Harrah's management just wanted to see what it could get in a sale.

However, I think it is unlikely that Harrah's will get the price (the Aztar price) it wants, because I don't think there is much value in paying a price much higher than the one that was offered by Apollo Management and Texas Pacific Group. This is particularly true with regards to a breakup strategy, because Harrah's value is in the network and the ability to scoot patrons from one property to another -- the most important properties of which are in Las Vegas. So as you start selling off properties, you risk devaluing the rest of the network.

That said, I think investors should approach Harrah's stock as if the company will continue on its own; in fact, if I were the gambling type, I might even be willing to bet that Harrah's puts in a bid for Station Casinos before somebody else gives Harrah's the price it would want to make the sale.

Fool contributor Jeff Hwang owns shares of Ameristar Casinos, which is a Motley Fool Hidden Gems pick; Jeff also has a CAPS rating of 99. The Fool's disclosure policy is always a safe bet.