Welcome to the Foolish Dealbook, where we take you inside Wall Street's biggest deals to see just how they went down. On Dec. 19, private equity firms TPG Partners and Apollo Management agreed to purchase Harrah's (NYSE:HET) for $90 per share. With a total value of nearly $28 billion, the deal was 2006's second-biggest leveraged buyout.
Gambling laws made this an exceedingly complex deal, so Harrah's negotiated a variety of protections for its shareholders. It'll get a reverse break-up fee of $250 million if Apollo and TPG prove unable to obtain the necessary approvals. There's also a "ticking fee" -- if Apollo and TPG do not close the transaction by Feb. 29, 2008, they'll have to pay an additional $0.01973 per share, per day, over the $90 buyout price. That adds up to roughly $3.7 million per day.
How the deal got done
- August 2006: Apollo contacted Harrah's to discuss the possibility of a leveraged buyout. The talks then included TPG.
- Sept. 25: Apollo and TPG sent a buyout proposal for $81 per share.
- Oct. 1: News of the offer leaked to the media, and on Oct. 2, Harrah's issued a press release confirming the proposal.
- Oct. 9: Apollo and TPG increased their bid to $83.50. Again, this leaked to the press within a couple of days.
- Nov. 27: "Company B" offered cash and stock to buy Harrah's for roughly $87 per share. The Harrah's proxy does not mention the identity of the bidder because of a signed confidentiality agreement. Company B is rumored to be Penn National (NASDAQ:PENN).
- Dec. 12: Apollo and TPG offered $88.50 per share in cash. Company B offered a cash/stock price of about $86.92 per share.
- Dec. 14: Apollo and TPG increased their bid to $90 per share in cash.
- Dec. 20-Jan. 13: Harrah's financial advisor, UBS, contacted 28 potential buyers, but none made an offer.
Valuation
Peter J. Solomon Company (PJSC) performed a valuation on Harrah's, also analyzing the financials of Ameristar Casinos (NASDAQ:ASCA), Boyd Gaming (NYSE:BYD), Isle of Capri Casinos (NASDAQ:ISLE), Las Vegas Sands (NYSE:LVS), MGM Mirage (NYSE:MGM), Penn National Gaming (NASDAQ:PENN), Pinnacle Entertainment (NASDAQ:PNK), and Wynn Resorts (NASDAQ:WYNN). Here are some of the results:
|
Enterprise value as a ratio of: |
Multiples |
|---|---|
|
Current-Year 2006 Net Revenue |
2-3 |
|
Trailing-12-Month EBITDA |
9.5-12 |
|
Current-Year 2006 EBITDA |
9-11 |
|
Current-Year 2007 EBITDA |
8-10 |
Applying these multiples, PJSC believed that Harrah's valuation range was $65 to $120 per share. Just a bit wide, huh? This is actually common for buyout valuations -- the analysis aims to determine whether the deal is "fair."
The valuation report also included several paragraphs of legal disclaimers, which unfortunately failed to discourage shareholders from filing lawsuits. Fourteen shareholder lawsuits were filed over the Harrah's deal, typically claiming that the buyout price was "inadequate and unfair."
The dealbook lowdown
Reasons behind the buyout include Harrah's need to make significant capital investments, and the company's fears that overall weakness in the Atlantic City market would lead to similar slumps in its share price. The board considered a variety of scenarios, including issuing a large dividend and spinning off its valuable real estate holdings. After much discussion and analysis, Harrah's board decided that the $90 cash offer would provide the best return for shareholders.
Get a great deal on further Foolishness:
- Boyd Not Out of the Game Yet
- A Penn National Bid for Harrah's?
- Gaming Roundup: Harrah's and Penn National
Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked 1,590 out of 24,619 in CAPS. Ameristar is a Motley Fool Hidden Gems pick. The Fool has a disclosure policy.
