Penn in Potential Harrah’s Bid?

In what many consider would be an audacious move, it looks as if Penn National Gaming is going to make a run at outdoing Apollo Management and Texas Pacific Group in their attempts at a takeover bid Harrah’s Entertainment.

But to pull it off, Penn is uniting with hedge fund D.E. Shaw and getting additional financing from Lehman Brothers and Wachovia Corp in an attempt to buy the world’s largest gaming company (as measured by the number of properties).

A final number regarding the amount that will be offered has yet to finalized, but if the offer is to be taken seriously it would have to top the existing offer of $15.5 billion that is already on the table.

Penn National Gaming is mostly a regional company with no Las Vegas presence, owning horse-racing tracks and some riverboat casinos under the Argosy and Hollywood monikers. Harrah’s currently has more than 40 casino resorts including some of the most recognizable names in the business including the ubiquitous Harrah’s flag as well as Caesars, Horseshoe and Paris Las Vegas. Harrah’s manages a good sized chunk of the Las Vegas Strip with properies such as Tropicana and Imperial Palace and has nearly half the casino resorts in Atlantic City. Just last year Harrah’s bought Caesars Entertainment for more than $6.5 billion.

In an investors note from Dennis Forst, Managing Director, Equity Research Analyst, with KeyBanc Capital Markets he said the deal is purely speculation at this moment, but the firm feels the offer could happen. He also believes it is just a matter of time before Harrah’s does go private.  "We have maintained our belief that the company would eventually be taken private. While this report serves to reaffirm our position, we point out that the same CNBC talking head had 'sources' of the opposite opinion less than a month ago."


Joe Weinert, vice president of consultancy with Spectrum Gaming told MarketWatch that "it's difficult to know what to believe at this point -- this could simply be chatter that has the effect of maximizing the price for Harrah's. This strikes me as a very big fish for Penn to swallow. Acquiring Harrah's does not seem to fit Penn's disciplined strategy of growth. Then again, it makes sense for Penn to enter the Las Vegas and Atlantic City markets so as to provide aspirational resort properties for customers in their growing regional network of casinos."

Currently, Harrah’s rakes in about $2.4 billion a year but is weighed down by $10 billion in debt.
The crown jewel for potential suitors is 350 contiguous acres ripe for development or redevelopment in the heart of the Las Vegas Strip. There’s enough land here to keep a company growing for 20 years or more. Based on recent deals the land is valued at more than $13 million an acre, making it some of the most expensive land in the world.
Harrah’s had also been scheduled to make a major announcement regarding a major announcement regarding a major project in Atlantic City this month, but with these deals on the table it is  unlikely the company will commit to a more than $1 billion project if it plans to be sold.

On Wall Street Penn National Gaming was actually down 2.36 percent on the news to $37.26. Harrah’s Entertainment, however, was up 0.65 percent to $78.97.

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