Despite massive debt, Harrah's manages to make major moves last week

For a company that seems to be barely keeping its head above water, Harrah's Entertainment behaved more like an angered shark than a wounded catfish last week. Despite the fact that the company is laboring under massive amounts of debt since being taken private in 2007 by Apollo Management and Texas Pacific, Harrah's last week made moves in two jurisdictions that reaffirmed that gaming's largest company is not to be taken for granted.

In Las Vegas, Harrah's Entertainment has purchased part of Planet Hollywood's $860 million in debt, which some analysts say could lead to an eventual takeover of the property by Harrah's.

"With covenant and debt defaults looming around for some of these properties, (purchasing debt) is a potential way to gain eventual ownership of a property," Applied Analysis principal Brian Gordon told the Las Vegas Review-Journal.

University of Nevada-Las Vegas finance professor Mike Sullivan told the newspaper that if Harrah's can eliminate Planet Hollywood's debt, the property could still be a moneymaker.

"Harrah's is buying a position on the cheap right now but with long-term ideas," Sullivan told the newspaper. "They've got their foot in the door right now. They are picking up a position of influence, so they must be interested in acquiring assets."

Officials at both Harrah's and Planet Hollywood have declined to confirm the purchase, and many are wondering how the highly leveraged Harrah's managed to come up with the funds to buy the debt in the first place. However, Planet Hollywood must be grateful that Harrah's stepped in. The property was in danger of defaulting on its loan agreements, according to an August 14 filing with the Securities and Exchange Commission.

"Absent a capital contribution or an equity investment by third parties or a restructuring, (owners) do not believe that cash generated from operations, cash held in reserve by the lenders under the loan agreement, will be adequate to meet the anticipated working capital and debt service obligations," the filing said.

In Ohio, the company last week purchased Thistledown Racetrack from Magna Entertainment Corp. at auction for $89.5 million, placing it in a strategic position now that Ohio Governor Ted Strickland has approved VLTs at the state's seven racetracks. Even if Ohio voter approve four regional casinos in a competing referendum in November, one of whom would be in Cleveland, where the racetrack is located, Harrah's is still in good position.

Harrah's won an auction for the property after 40 rounds of bidding that had been started at $22.3 million by Penn National Inc. The auction was part of bankruptcy proceedings for the Delaware-based Magna, and has been approved by the bankruptcy judge. The purchase does require the approval of Ohio gaming regulators, however.

Thistedown is among 11 racetracks that Magna is selling off, others being Santa Anita, Lone Star and Golden Gate Fields. It recently sold Remington Park to the Chickasaw Nation of Oklahoma.

"We are excited to be entering Ohio and look forward to developing a first-class facility in Cleveland which will create significant employment opportunities in the region," the gaming company said in a statement issued shortly after the sale was approved.

Although the world's largest gaming company also has the largest load of debt in the industry, many analysts say the purchase is a smart move, especially when combined with its other purchase of part of Planet Hollywood's debt.

But not every analyst takes that view. Some note that the gaming giant is skating on the edge of bankruptcy as it tries to cut its debt ($19.3 billion). According to the Las Vegas Review-Journal, David Schwartz, director of the University of Nevada, Las Vegas's Gaming Research Center, commented that common sense would require asking why a company that is in such debt would add more to it, especially in light of recent Wall Street history. But he added that in the long run it might be seen as a bold investment.

Reportedly Harrah's executives believe that many properties are underpriced because of the recession, and that this provides smart investment opportunities, especially since the company wants to expand into the Ohio market. It will be placed to do so whether the voters pass the four resort casinos, or if the gaming expansion is limited to the deployment of video lottery terminals that has been ordered in the state's racetracks by Strickland. Each racetrack is entitled to have 2,500 VLTs apiece.

Another gaming financial analyst, Bill Lerner of Union Gaming Group, thinks that Harrah's move is shrewd, "Harrah's has more liquidity than the market thinks," Lerner said. "They happen to have a lot of debt relative to the amount of cash flow they're generating in this recession. But their debt covenants are structured quite favorably. They're in good relative shape from a liquidity perspective."

Harrah's is actively moving in other theaters as well, for instance lobbying to legalize online gaming and closely watching Massachusetts, where the legislature is widely expected to pass some form of gaming expansion this year.

Harrah's paid $42 million in cash for the racetrack, and plans to pay the rest from revenues from the VLTs that Strickland has authorized. That is something of a bet on Harrah's part since the governor faces two court challenges currently in the state Supreme Court.

One plaintiff has sued to put the governor's plan before the voters. Another has challenged the constitutionality of the VLTs being deployed as part of the Ohio Lottery.

However, as another financial expert observed, "You don't make your money being cautious."

By Staff