The proposed US$15 billion buyout of the world's largest casino operator, Harrah's Entertainment Inc, by two private equity firms could spark a wave of bids in a sector that is rich in cash flows and real estate, analysts say -- assuming the deal can be successfully sealed.
Private equity firms have mostly avoided the gambling industry to dodge the harsh eye of regulators, who probe everything from one's business history to personal credit card use and golfing buddies to weed out those who could damage the industry's reputation.
But regulators have gradually refined the target of their probity to chief decision makers as more and more complex organizations sought to carve out a piece of
If Texas Pacific Group and Apollo Management overcome the regulatory obstacles facing the fifth-biggest leveraged buyout in history, it could pave the way for others, Wachovia Securities fixed income analyst Dennis Farrell said.
"With a large transaction of this size, it will prove to everyone that this is the way we set up the ownership structure and we're able to get licensing in these jurisdictions this way, and it really kind of creates a blueprint for others," he said.
David Katz, an analyst at CIBC World Markets, agreed.
"Should they succeed, there is a valid argument for a new perspective on the valuation of gaming stocks," he said. "It could take us 12 to 18 months to find that answer out. However, I think that's what's at stake here."
The latest offering of US$81 a share sets a new precedent in the industry -- it would be the largest ever buyout in gambling history and the first takeover bid by private funds of one of the major players among publicly traded casino companies. Analysts, lawyers and industry players are watching with interest.
"It's the normalization of our industry in the economy of the United States," said American Gaming Association president Frank Fahrenkopf. "This kind of thing happens all the time in other industries. It's new to ours."
The probe of the top executives who come forward to control the new entity could take as long as two years, some analysts speculated, given that Harrah's owns some 40 properties in Nevada, New Jersey, Missouri and Mississippi, each with their own regulatory bodies and standards.
Credit ratings agencies, however, have frowned on the deal, noting Harrah's approximately US$10.8 billion in debt could balloon, increasing the risk to lenders. Standard & Poor's and Fitch cut Harrah's to junk status on Monday, while Moody's changed the outlook on Harrah's to negative.