November 23, 2010 > Harrah's folds hand on planned stock offering
Harrah's folds hand on planned stock offering
By Ellen Gibson and Barbara Ortutay, AP Business Writers
NEW YORK (AP), Nov 19 - Harrah's Entertainment Inc. canceled its initial public offering Friday, folding its hand for now on a risky bet on returning to the stock market just three years after it went private.
The company, whose properties include the Flamingo, Caesars Palace and Bally's casinos, was expected to price the offering on Thursday and begin trading on the Nasdaq this week. Harrah's had said it would raise as much as $531 million for casino projects and to help with its heavy debt burden.
The casino operator, based in Las Vegas, had planned its IPO in what has been a rough time for the industry, as people cut back on gambling and opted to save their money instead. Harrah's reported a loss of $634.4 million during the nine months that ended Sept. 30, though recently its business, along with the broader casino industry, has shown signs of improvement.
``Certainly conditions for a potential IPO were worse six months or a year ago,'' said Matt Jacob, an analyst with Majestic Research. But while things have stabilized in most markets where Harrah's has casinos, they ``haven't truly improved yet,'' he added.
``Potential investors need to be willing to bet on the recovery of the gaming industry beyond what we have seen so far,'' he said. That means betting on broader economic recovery in the U.S., since hotels and casinos are beholden to consumer sentiment and discretionary spending.
The IPO would have helped ease the company's heavy debt load. Harrah's has nearly $20 billion in debt, and Francis Gaskins, president of IPOdesktop, estimates the company is spending as much as 22 percent of its revenue on interest payments. This would put interest payments at about $1.47 billion for the first nine months of the year.
Much of the company's debt was piled on by two private equity companies - Apollo Management Group, led by buyout titan Leon Black, and Texas Pacific Group - which took Harrah's private three years ago. They paid $30.7 billion in 2007 in one of the biggest leveraged buyouts ever. At that time, private money was on a shopping spree for casino operators, which were considered hot targets for their cash-generating ability and real-estate holdings. Then the financial crisis hit.
The company's revenue, which peaked the year of the buyout at $10.8 billion, tumbled 6 percent to $10.1 billion in 2008 and then an additional 12 percent to $8.9 billion in 2009. Recently, Harrah's business has started to stabilize, and the company had planned to use the IPO to expand. Apollo and TPG planned to keep majority control of it after the IPO.
Harrah's, which plans to change its name to Caesars Entertainment Corp., owns or manages more than 50 casinos in 12 states and six countries. But it lacks a gambling presence in Asia, where casino operators are seeing strong growth, helped by resilient regional economies with an expanding middle class.
``Macau is a bright spot for the industry and Singapore is off-the-charts robust, but it doesn't do Harrah's any good,'' said Eugene Martin Christiansen, CEO of casino-management consulting firm Christiansen Capital Advisors LLC.
Meanwhile, Atlantic City, where the company operates four casinos, has not yet shown signs of recovery. The expansion of gambling in the New York tri-state area and Philadelphia has increased the pressure on the New Jersey resort city, where Harrah's is the dominant player, said Chris Jones, an analyst with Telsey Advisory Group.
And because of its strong presence in regional markets like St. Louis, Kansas City, Chicago and Mississippi, Harrah's needs ``middle-America, salt-of-the-earth customers to start spending more -- a large question mark in terms of the pace of the U.S. recovery,'' Jones said.
But the industry overall does seem to have reached a turning point. In a recent note to investors, Jefferies analyst David Katz said that with casino sentiment at a ``historical low,'' new property openings and the improving economy should accelerate earnings growth for casinos and gaming companies. According to the Nevada Gaming Control Board, the number of people visiting Las Vegas was up 2 percent in September from a year earlier. Gambling revenue on the Strip, 29 percent of which comes from Harrah's properties, grew 2.8 percent.
Harrah's shelved its offering a day after General Motors returned to Wall Street with its IPO. There have been 130 initial public offerings this year, more than double last year's figure.