Harrah’s Deal Could Leave Strip With a Pair of Kings

After sitting on the sidelines while two of its biggest rivals decided to team up, Harrah’s Entertainment Inc. wants to double down on the gambling business by purchasing Caesars Entertainment Inc.

The purchase would create the world’s largest gambling enterprise, eclipsing the proposed $4.8-billion acquisition of Mandalay Resort Group by Los Angeles billionaire Kirk Kerkorian’s MGM Mirage, a deal announced a month ago.

The boards of both Harrah’s and Caesars approved the deal Wednesday evening, according to a source familiar with the talks. The companies are expected to announce today the roughly $9.5-billion purchase, which includes the assumption of debt.

If the deal passes the scrutiny of federal and state regulators, the combined business would control about 20% of the Las Vegas Strip, including six major properties -- Caesars Palace, Paris Las Vegas, the Flamingo, Bally’s, Harrah’s and the nearby Rio -- that boast nearly 17,000 hotel rooms, 9,200 slot machines and more than 500 table games.

That would speed the transition of the Las Vegas Strip from a hotly competitive market into one in which just two large companies control a large majority of the rooms, tables and machines.

“There will be two behemoths,” said Hal Rothman, a chronicler of Las Vegas history and professor at the University of Nevada, Las Vegas. “This is an industry that has become so big and important, players are getting swept off the board.”

The consolidation in the casino industry reflects the desire by giant corporations to take advantage of what may be the nation’s strongest tourism and convention market.

“Las Vegas is hot. You see it in virtually every element of the business,” said Patty Wright, an industry analyst with Fitch Ratings in New York.

After suffering a nose dive in visitors in the months following the Sept. 11 terrorist attacks in 2001, Las Vegas has roared back, its image honed by its erotically suggestive “What happens here, stays here” advertising campaign.

Popular television shows such as “Las Vegas,” the NBC drama series that chronicles the sex lives and work lives of a fictional casino’s staff, and the Fox unscripted show “The Casino,” set at the Golden Nugget in downtown Las Vegas, have burnished the luster. Beyond that, three networks -- ESPN, Bravo and the Travel Channel -- are broadcasting Vegas poker tournaments.

All the attention is paying off at the roulette wheels and craps tables in the casinos. Through May, gambling revenue on the Strip topped $2.2 billion, a 16% gain from the same period last year. Almost 16 million people visited Las Vegas through May, up 7% from a year ago. Casinos are filling 90% of their rooms and the average nightly charge has climbed almost 10% compared with last year, to $94.38.

Consolidation could launch room rates on a long-term upward trend for the 35 million people -- a third of whom come from Southern California -- who visit the gambling and entertainment mecca annually, experts said.

“As concentration [of hotel ownership] goes up, room rates generally follow,” said R. Keith Schwer, a UNLV economist.

If the transaction is completed, Harrah’s would become the biggest counterbalance to the possible MGM Mirage-Mandalay venture.

Unless modified by antitrust regulators, the Mandalay purchase would give MGM Mirage almost 50% of the business on the Strip, including 36,500 rooms, 22,000 slot machines and 1,050 table games at the Bellagio, MGM Grand, Mandalay Bay Resort, Excalibur and seven other hotels.

The weight of that deal pushed Harrah’s to step up efforts to gain a greater foothold on the Strip, according to sources familiar with the company’s thinking. Prior to the MGM Mirage’s move for Mandalay, Harrah’s was mulling over buying a second-tier casino along Las Vegas Boulevard or building its own new resort.

Harrah’s is among the most geographically diverse casino operators in America. Its business stretches across 13 states, from a management contract for an Indian casino near Temecula in the West to properties on the shores of Atlantic City, N.J., in the East.

Unlike MGM Mirage, which focuses on high-stakes gamblers, Harrah’s works the lucrative slots business, a trade in which customers make lots of small bets. Yet despite its reach, Harrah’s has had trouble using its industry-leading database of 20 million gamblers to drive business in Las Vegas.

“Its customers are going to Las Vegas, but they don’t tend to stay at its two properties there,” said Wright, the Fitch analyst. “The Rio and Harrah’s just aren’t that attractive.”

Buying Caesars would give Harrah’s prime Las Vegas properties it can use to hook customers from its other markets, Wright said.

The deal would combine two storied names in the casino business.

Harrah’s started out 67 years ago as William Harrah’s bingo parlor in Reno. The early gambling entrepreneur used bingo income to open the Harrah’s Club casino there in 1946, expanding into the Lake Tahoe area in the 1950s. The company jumped into Atlantic City several decades later, and entered Las Vegas in 1983 when it took over management of the River Boat Casino.

The company has gone through a variety of owners -- including Holiday Inn -- before emerging as an independent business again in 1995.

Caesars can trace its roots all the way back to mobster Bugsy Siegel, who in 1946 opened the Flamingo, the original gambling resort on the strip.

Hotel tycoon Conrad Hilton purchased the Flamingo and the International Hotel and Casino -- now called the Las Vegas Hilton -- in 1970, pushing the company into the gambling business. The Hilton chain spun off its casino business into a company called Park Place Entertainment in 1998. Park Place purchased Caesars Palace a year later and recently changed it corporate name to tap the Caesars brand.

A combined Harrah’s and Caesars would have a projected revenue of more than $8 billion and 95,000 employees working at more than 50 casinos.

Its power in the gambling markets of Atlantic City and Mississippi might prompt state and federal regulators to require Harrah’s to divest several properties, analysts said.

According to people familiar with the talks, the cash-and-stock transaction is tentatively valued at about $9.5 billion, including $4.3 billion in debt. That pencils out to about $17 for each Caesars share, a 22% premium from its New York Stock Exchange close Tuesday, before word of the talks got out.

Shares of Caesars rose $2.08, or 14.9%, on Wednesday to close at $16. Harrah’s shares fell $1, or about 1.9%, to $50.98. Both companies are traded on the New York Stock Exchange.

Sources familiar with the negotiations between the two companies said Harrah’s probably would retain Caesars as a brand name only. Moreover, it’s unlikely much of Caesars’ corporate staff would remain with the business once the two companies are combined.

If the $17-per-share price holds up, analysts believe that shareholders will support the transaction. The thinking is that the combined business would have the clout required to compete in Las Vegas and the geographic breadth to make money in other markets. A Harrah’s-Caesars would even have a piece of California’s Indian gambling business, holding management contracts for two tribal casinos near Temecula and a third near Fresno.

But some in Las Vegas aren’t convinced that the consolidation represented by this deal and the MGM purchase of Mandalay is good for the city’s vitality.

“From an economic standpoint, I obviously see the merits of these mergers,” said Tim Poster, who bought the Golden Nugget casino from MGM Mirage last year. “However, we may be running a risk to the appeal of Las Vegas if all of our hotels and resorts become too homogenized.”

Rothman, the UNLV historian, agreed.

He said it had been the “great entrepreneurial visionaries” such as Steve Wynn, who built richly themed and detailed hotels including the Mirage, Bellagio and Treasure Island on the Strip -- rather than the big corporations -- that had pushed the city forward.

Indeed, Wynn’s Mirage set off a building binge in the 1990s that pitted his company against Mandalay, Kerkorian’s MGM and Park Place that turned what was a town for hard-core gamblers into a tourism powerhouse.

“One of the great attractions that has always set Las Vegas apart as a destination is the city’s ability to re-create itself every decade or so,” Poster said. “My concern is that these mergers could hamper those efforts in the years to come.”

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Big players

Largest casino operators if the acquisitions are completed, based on 2003 revenue (in billions):

Caesars/Harrah’s $8.8 MGM/Mandalay 6.4 Boyd Gaming 1.3 Penn National 1.2

Source: Bloomberg News