Moody’s is out with a new report on Harrah’s, the casino giant taken private two years ago for $27 billion. And its conclusions are not good for Harrah’s owners Apollo Management and TPG Capital.
Instead, Moody’s virtually compares the pair — only identified as “management” — to degenerate gamblers. The company has enormous debts, but rarely takes the opportunity to pay them down. Instead, it keeps spending on new initiatives, hoping that the payouts will constitute salvation.
From the report:
Harrah’s management seems more interested in jump-starting growth initiatives than in reducing debt… In announcing the separate debt-for-equity investment with equity sponsors and a hedge fund, Harrah’s said the equity injection will be used for “further balance sheet optimization and strategic investments.” So it appears to us that Harrah’s will not use much of the expected equity investment to reduce debt.
Just to put Harrah’s leverage load into context, the company’s annual interest burden consumes a whopping 90% of property income. Overall, Harrah’s leverage is at around 10x EBITDA. To get the figure down to a (slightly) more managable 8x, the company would need to increase EBITDA by 40 percent. Tough for a gaming company to achieve in any economy, but particularly in this one.
So what to do? Moody’s lays out three options:
1. Sell assets
2. Go public
3. Restructure existing debt.
The first one makes sense, but Harrah’s seems to disagree. In just the past year, it has acquired the Thistletown racetrack and the Planet Hollywood Resort & Casino (both of which added to the debt burden). Number three sounds great, except if you’re an existing bondholder (particularly a litigious one).
All of this leaves us with option #2: An initial public offering, with a promise that proceeds will be used to pay down debt. That last part is critical, since public market investors are unlikely to sign on as spending spree facilitators. Sure’s it’s a Hail Mary, but when you’re down by six with just a few seconds left on the clock…
*** You can get the full Moody’s report on Harrah’s by going here.
*** Blackstone Update: I wrote a lot about Blackstone on the website yesterday (including about its fund close), but one item that might have gotten lost in the live-blog stream: Tony James gave a non-confirmation confirmation that Freescale is talking to bankers about an IPO.
Now this came just hours after NXP — another large, PE-backed chipmaker ! — slashed its IPO target, but it’s still a remarkable development. Remember, Freescale not only was considered one of Blackstone’s biggest-ever mistakes, but one of the private equity industry’s biggest-ever mistakes.
Most stories on the turnaround have focused on the larger semiconductor rebound (all valid), but the private equity angle here shouldn’t be overlooked: Namely, the industry’s long-term nature often allows cycles to play through, turning sure-fire failures into successes (or at least break-evens). Yes, it’s a talking point. But sometimes talking points are legit.
The Blackstone Group has closed its sixth global buyout fund with $13.5 billion in capital commitments.
Unitas Capital and Teachers’ Private Capital have launched an auction for portfolio company Yellow Pages Group (New Zealand). The company is expected to be worth around $700 million.
Walt Disney Co. is in talks to acquire Playdom, a MountainView, Calif.-basedsocial gaming company, according to TechCrunch. Playdom has raised $80 million in VC funding, including $33 million earlier this year. Backers include Steamboat Ventures (a Disney VC arm), Bessemer Venture Partners, New World Ventures, New Enterprise Associates,Lightspeed Venture Partners and Norwest Venture Partners. www.playdom.com
Betable, an onlinewagering service based in London, has raised $3 million in first-round funding led by Atomico. www.betable.com
TurnHere Inc., an Emeryville, Calif.-based Internet video production and advertising company for businesses, has raised $3 million in new funding, according to a regulatory filing. It previously raised over $7.5 million from Venrock, Hearst Interactive Media, Ron Conway and founder Bradley Inman. www.turnhere.com
Cerberus Capital Management has offered to acquire building products distributor BlueLinx Holdings Inc. (NYSE: BXC). The $3.40 per share offer represents a 36% premium to Wednesday’s closing price, and would value BlueLinx at around $111 million.
J.C. Flowers & Co. has agreed to purchase €450 million worth of convertible bonds in Spanish bank Banca Civica, according to Bloomberg.
San Miguel Corp. has shortlisted two bidders for a minority stake in its Pure Foods subsidiary, after receiving five offers.
Mason Wells has completed its acquisition of Appleton’s Performance Packaging operations. The deal was valued at around $58 million. The newly-independent company will be named NEX Performance Films Inc., and will make single and multilayer polyethylene films.
Syncsort Inc., a Woodcliff Lake, N.J.-based provider of data management and data protection software, has secured a $125 million credit facility. Therefinancing was arranged by Golub Capital. Syncsort is a portfolio company of Insight Venture Partners.
Gordman’s Stores Inc., an Omaha, Neb.-based off-price department store chain, has set its IPO terms to 5.36 million common shares being offered at between $13 and $15 per share. It would have an initial market cap of approximately $280 million, were it to price at the high end of its range. The companyplans to trade on the Nasdaq under ticker symbol GMAN, with Piper Jaffray and Wells Fargo Securitiesserving as co-lead underwriters. Sun Capital Partners acquired Gordman’s in September 2008.www.gordmans.com
Green Dot Corp. (NYSE: GDOT), a prepaid debit card company, saw its shares rise 22.2% in its first day of trading. Shareholders include Sequoia Capital and Total Technology Ventures.
Branford Castle has sold E-Mon, a Langhorne, Penn.-based provider of smart energy submeter systems and software, to Honeywell Inc. (NYSE: HON). No financial terms were disclosed.
The Carlyle Group has retained Goldman Sachs to help sell Philosophy Inc., a toiletries and cosmetics company that could be worth more than $1 billion.
Castanea Partners and Weston Presidio have agreed to sell Integrity Interactive, a Waltham, Mass.-based provider of compliance and ethics solutions, to SAI Global Ltd. (ASX: SAI). No financial terms were disclosed.
Ingenix has agreed to acquire Picis Inc., a Wakefield, Mass.-based provider of healthcare software for high-acuity areas of the hospital. No financial terms were disclosed. Picis shareholders include Brown Brothers Harriman and Camden Partners.
Rakuten Inc.of Japan has completed its purchase of online retailer Buy.com for $250 million in cash. Sellers included Clearlake Capital Group, which bought a 9% stake in Buy.com three years ago.
Michael Cuff has joined J.F. Lehman & Co. as managing director of operations. He previously was an executive in Honeywell’s aerospace division.
Simon Palley has agreed to join the board of Land Securities as a non-executive director. He is a former managing director with BC Partners.