Doubling Down

In a gaming industry where CFOs are big players, two acquisitions reflect very different strategies.

Forget the World Series of Poker. The big game in Las Vegas these days is casino-industry consolidation. In mid-June, Mandalay Resort Group signed a $7.9 billion merger agreement with MGM Mirage — itself the result of a 2000 combination of two big competitors that had been headquartered right across the Las Vegas Strip from each other. Then just weeks after the MGM-Mandalay deal, Harrah’s Entertainment Inc. announced plans to buy Caesars Entertainment for $9.4 billion in cash, stock, and assumption of debt. Suddenly, two companies are on track to control two-thirds of the Strip’s more than 72,000 rooms.

15,000 Rooms

Both acquiring companies aim to capitalize on a recent burst of strength in Las Vegas gaming by increasing their presence on the Strip. A company “has to take into consideration the market environment,” says Harrah’s CFO Charles Atwood. But in any consolidating industry, it isn’t enough simply to keep up with a rival’s growth: deals must be tailored to the specific needs of the combining companies, drawing on their strengths, addressing their weaknesses, and designing the new entity’s place in the evolving industry. Viewed this way, the MGM and Harrah’s acquisitions are less alike than they might seem.

“Our deal is very different from MGM-Mandalay Bay,” says Atwood. “Their deal is more about a big presence in one market, while ours is more about exposure to many markets.” He notes that Harrah’s currently operates only two Las Vegas properties, with a total of 5,000 rooms: Harrah’s Las Vegas and the Rio.

Caesars has four casino-hotels in the city with twice that many rooms — Caesars Palace, Bally’s, Paris, and the Flamingo. But after Harrah’s and Caesars combine, “no more than 25 to 28 percent of our earnings will come from a single market,” thanks to the nationwide diversification of both businesses. Atwood calls the Harrah’s-Caesars deal “a continuation of our acquisition strategy,” including the recently closed $1.5 billion purchase of Horseshoe Gaming Holding Corp.

The plan is to give customers from Harrah’s 28 gambling venues — including Atlantic City and riverboat gaming sites — more Harrah’s-owned casinos to play when they hit Vegas. “Customers like to play in more than one place,” says Atwood. And right now, “we have customers we turn away in Las Vegas because we don’t have enough rooms.”

The market has reacted rather skeptically to the Harrah’s-Caesars combination, but some see the two companies as compatible. “Bally’s and the Flamingo are very much Harrah’s type of properties,” comments Los Angeles-based Dennis Forst, a gaming analyst at KeyBanc Capital Markets. “And Caesars has a couple of Indian gaming projects, which is the kind of thing that Harrah’s is very good at.”

If the combined company can succeed in transferring Harrah’s technical and operational expertise to Caesars’s underperforming properties, “improvement at Caesars would more than cover what they paid,” says Carl Noble, a valuation expert. The goal, he says, will be for Caesars to boost its operating margins from 2003′s 10 percent to the 16 or 17 percent typical of Harrah’s.

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