Nothing will change immediately, or even soon, for the gaming giant, as the deal has to be ratified by the company's shareholders and then approved by the gaming commissions of every state in which the company has property, 13 in all. This process will take months, but it is unlikely that regulatory issues or a shareholder coup will hold up a deal of this size. The per share price of $90 is significantly higher than traded value of the company's stock, which closed at $82.18 on the NY Stock Exchange Monday, up $2.68 on the day.
The SEC filing documents on the buyout do herald a change in strategy for the casino giant, refocusing on reducing debt, currently at $10.7 billion, and turning attention away from high-price acquisitions, a trademark of the Harrah's corporate ethos over the past decade. Harrah's CEO Gary Loveman, in a presentation to key employees this week, projected a doubling of that current debt after the leveraged buyout, leading to the shift in strategy.
According to wikipedia.com, a "leveraged buyout is a strategy involving the acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans, in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital. In an LBO, there is usually a ratio of 70% debt to 30% equity."
The Harrah's buyout fits this description, with a projected $21 billion corporate debt against an estimated $7 billion in equity, leading Standard & Poor's Rating Service to drop the company's credit rating from a "BB" to "BB+" on Wednesday, while leaving the company on credit watch for a potential further downgrade.
"The financial realities of being a moderately leveraged company to being a highly leveraged company is that there's just less financial flexibility on a capital spending front," said Susquehanna Financial Group analyst Robert LaFleur.
"You have competing uses for each dollar of free cash flow. You know, do you invest it in another project or do you use it to de-lever the company that you just levered up to financially execute this transaction?" he said. Loosely translated, a company with three times as much debt as available equity isn't going to be buying any other huge casino chains any time soon, and the company leadership will be paying very close attention to how every dollar is spent. I suggest using your comp dollars within the next six months.
What does this mean for gamblers and poker players? Some analysts have expected less central properties to go on the block for years, namely the Rio in Las Vegas and the Showboat in Atlantic City. Sale of these properties may become a higher priority in light of the leveraged nature of the new Harrah's. The World Series of Poker brand may be spun off, but that may be too much to hope for for poker players, as the costs associated with the brand are insignificant in comparison to the profitability of the name and its associated tournaments and merchandising licenses.
Short term, it means nothing for gamblers. Long term, it probably means that the long-rumored center-strip implosion/rebirth of Harrah's/Imperial Palace/Flamingo is likely a concept that will wait several more years before seeing birth, although according to the Chicago Tribune, "Loveman told The Associated Press on Tuesday that he was ‘confident' that master plan redevelopments on the Las Vegas Strip and Atlantic City, N.J., would continue, and added there were no plans to sell off any properties."
So we don't know what the future holds, but we do know that if you bought Harrah's stock last month in the face of a rumored $15 billion buyout, then you made a good buy.