Apollo, TPG Roll The Dice With $15B Harrah’s Bid

Apollo Management and Texas Pacific Group (TPG) are taking a bet that gambling has a future, but don’t expect other buyout firms to follow suit.

The two private equity firms have made a $15.1 billion offer for the equity of Harrah’s Entertainment (NYSE: HET). The bid implies a total enterprise for the casino operator of $26 billion, putting the deal in the pantheon of largest buyouts ever.

Apollo, New York, and TPG, Fort Worth, Texas, offered to acquire all of the common stock of the publicly-traded casino and resort operator for $81 per share. The offer sent the stock price of Harrah’s up about 14% on the first day of trading after the offer was made public from abot $66 per share before the deal was announced to $80 per share. Harrah’s stock price levelled off at $75 per share. Meantime, shares of other casino operators rose in sympathy as investors speculated that cash-rich private equity firms might make play for them as well.

Citigroup Analyst Geoffrey Davis predicts that while the TPG and Apollo offer had “a good change of being realized,” shareholders will likely hold out for a higher price of between $84 and $85 per share, translating into a cash offer of between $15.6 billion and $15.8 billion. A rival bid may also push the price up, he said. Davis was less optimistic that the deal would trigger a wave of casino buyouts.

High inside rates of ownership, heavy capital expenditure plans and burdensome licensing regulations–these things are toxic to many private equity firms, according to Davis. Boyd Gaming (NYSE: BYD) is cited as the most likely of the casino companies to be taken private in an LBO. Boyd recently swapped land in Las Vegas with Harrah’s in a transaction that Boyd expects will bring a gain of $280 million. Davis also cited Station Casinos (NYSE: STN) as an attractive LBO candidate.

The bid marks a high point in the quest by buyout firms for hotel and resort properties. Since December 2002, American Capital Strategies has been an investor in FutureLogic, a manufacturer of printers for the gaming markets (see Buyouts, March 14, 2005). The firm initially infused $27 million of debt into the company as part of a ClearLight Partners buyout. It later bought out ClearLight’s stake and became the controlling stakeholder in the company with a $108 million acquisition.

Meantime, the Los Angeles-based Colony Capital recently teamed up with Kingdom Hotels International to acquire Fairmont Hotels & Resorts Inc. (TSX/NYSE: FHR) for $3.9 billion (including debt assumption), or $45 per share (see Buyouts, Feb. 6, 2006). Fairmont will be combined with Raffles Hotels & Resorts, creating a luxury hotel business valued at approximately $5.5 billion. In an irony only a heated buyout market can bring, Colony Capital actually beat out a competing bid by Fairmont when it acquired Raffles last September for about $1.7 billion, as Buyouts reported earlier.

TPG has been involved in other record-setting deals this year. The firm joined The Blackstone Group, The Carlyle Group and Permira in agreeing to pay $17.6 billion to take Freescale Semiconductor Inc. (NYSE: FSL). The deal, scheduled to close sometime in the fourth quarter, would swipe the record for largest tech buyout deal set by the $11.4 billion 2005 take-private of SunGard Data Systems Inc. by a consortium of seven private equity firms.

For its part, Apollo recently agreed buy the silicones and quartz businesses of General Electric Co.—businesses that make up the majority of GE’s advanced materials unit—in a transaction valued at approximately $3.8 billion in cash and securities.

Harrah’s Entertainment, founded in Reno, Nev. in 1937, bills itself as the world’s largest operator of “branded casino entertainment.” It operates casinos, hotels and resorts throughout the United States and abroad. It was the first casino operator to be listed on the New York Stock Exchange. Executives at TPG declined to comment. Spokesmen for Apollo and Harrah’s did not return calls for comment. — M.S.