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Yinan Zhu

Harrah's Entertainment (NYSE:HET) runs casinos and resorts primarily in the U.S. and U.K. The company's 48 properties span 3 million square feet of casino space as well as over 38,000 hotel rooms,^[1] ranking Harrah's as one of the largest such operators in the world.

As of 2007, HET was in the preliminary stages of planning to develop a large 350-acre land parcel in Las Vegas, which lies between its existing Paris Las Vegas and Harrah’s Las Vegas hotels. While Las Vegas accounted for about 20% of gaming footprint and over half of all hotel rooms, Harrah's has been busy developing in locations such as Atlantic City and Biloxi, Mississippi as well as international locations in Spain and The Bahamas. ^[2] However, the company is not one of the six companies approved to develop in Macau, the fastest growing gaming destination in the world.

Harrah's Entertainment entered into agreements to be taken private by Apollo Management and Texas Pacific Group. The company had cleared all legal hurdles associated with this deal as of December 24, 2007.

Business Financials

HET has experienced steady, continuous growth since 2004. However, the company also holds significant debt of about $12 billion dollars, partly due to its strategic acquisition of Caesars in June 2005, as well as its more current claims of Imperial Palace and London Clubs. ^[3]

HET is the most geographically diverse casino ownership and operations company in the United States. As such, its geographic breakdown of revenue is more uniform than many of its primary competitors.^[4]

^Percentages based on 2007 3rd quarter earnings ^[5]

Despite its geographic diversity, HET relies heavily on its casinos, and derives only modest amounts of revenue from its other services.

^Percentages based on 2007 quarterly earnings^[6]

Key Trends/Forces

• Exposure to Fluctuating Interest Rates: Of the $12.1 billion debt incurred by HET as of December 31, 2006, $5.2 billion is subject to variable interest rates. For example, a hypothetical change of 1% to this interest rate would change interest expense by $52.4 million per year for the company.^[7]

• Buyout of HET: The buyout of HET by private equity firms Apollo Management and Texas Pacific Group is scheduled to close in early 2008 at $90 per share. This deal, initially subjected to numerous government regulations and legal hurdles ^[8], is now fully cleared to proceed as of Dec 24, 2007^[9]. While the certainty of this impending deal should peg share prices at $90, a failure to complete the buyout as planned may affect HET’s share price and operations negatively. ^[10]

• Government Regulations: Local, state, and federal authorities heavily regulate the gaming industry, which HET depends on for two-thirds of its revenue. For example, the government-mandated shutdown of casinos in Atlantic City during July 2006 significantly affected HET’s operations. Other regulations, such as those banning smoking in public facilities, may also adversely influence HET’s operations. In addition, the company’s exposure to international markets further exposes the company to foreign authorities. ^[11]

• Natural disasters : Natural disasters such as fires, floods, hurricanes and earthquakes will negatively affect HET’s operations. While it is primarily insured against such disasters, the company is still subjected to deductibles and/or maximum payouts, as well as rising insurance costs in the event of a natural disaster. For example, four of HET’s properties were closed due to hurricanes Katrina and Rita in August and September 2005.^[12]

• Tourism in Las Vegas: HET depends heavily on the health of tourism in Las Vegas, which has been steadily growing for the last two decades.^[13] However, the company currently has significant land holdings in the region, and plans to develop these lands in the near future. Any downturn in the demand for Las Vegas resorts and casinos will significantly limit HET’s growth opportunities.

• Lack of Exposure to Macau : Macau is the fastest growing gaming market in the world, overtaking Las Vegas in 2006(US)^[14] with gaming revenue compounding at 23% annually since 2001. HET's lack of exposure to this burgeoning market may indicate a potential slowdown of company growth, as well as a comparative disadvantage relative to its competitors that have operations in Macau.

Competition

In most markets, HET competes directly with other similar casino facilities in the immediate area of operation, as well as indirectly with other sources of entertainment. It is important to note that HET is the largest casino company in the United States, and is more geographically diverse than most of its competitors.

Las Vegas

Las Vegas has seen steady historical growth for the last 20 years and currently holds approximately 137,000 hotel rooms. ^[15] However, competition has intensified in recent years as the city’s gambling market reaches saturation. ^[16]

• Las Vegas Sands (LVS) owns and operates The Venetian, which has 4027 suites and 120,000 square ft. of gaming space. In addition, the company is currently developing the Palazzo, which consists of 3025 suites and 105,000 square ft. of gaming space.^[17]
• Wynn Resorts (WYNN) opened the “Wynn” in September 2006 with approximately 2716 suites and 110,000 square feet of casino space.^[18] A second project under construction, known as "Encore", will more than double the company's gaming space.^[19]
• MGM MIRAGE (MGM) owns and operates 9 of the most prominent resorts in Las Vegas, which sums to approximately half of all rooms and 39% of all gaming facilities on the Las Vegas Strip. ^[20]
• Boyd Gaming (BYD) tailors primarily to lower-end customers, and owns 10 properties in Las Vegas totalling 15343 rooms.^[21]

Atlantic City, New Jersey

• MGM MIRAGE (MGM) and Boyd Gaming (BYD) - (co-ownership) Borgatta Hotel Casino and Spa. -4068 rooms.

Illinois

• MGM MIRAGE (MGM) - Grand Victoria - 0 rooms
• Boyd Gaming (BYD) - Par-a-Dice Hotel Casino - 1130 rooms

Indiana

• Boyd Gaming (BYD) - Blue Chip Casino Resort - 2171 rooms

Louisiana

• Boyd Gaming (BYD) -
  • Treasure Chest Casino - 975 rooms
  • Delta Downs Racetrack Casino Resort - 1462 rooms
  • Sam's Town Hotel and Casino - 1096 rooms

Harrah's properties across the globe

Source:Company's 2006 10-K Filing^[22]

References

1. ↑ 2006 HET 10-k,Item 1A Pg. 14-15
2. ↑ 2006 HET 10-k,Item 1 Pg. 3
3. ↑ 2006 HET 10-k,Item 7 Pg. 23
4. ↑ 2006 HET 10-k,Item 1 Pg. 4
5. ↑ 2007 HET 10-q, Item 2 pg. 18
6. ↑ 2007 HET 10-q, Item 1 pg. 4
7. ↑ 2006 HET 10-k,Item 7 Pg. 40
8. ↑ "Gaming regulators set Oct. 17 hearing for Harrah's buyout", Press of Atlantic City
9. ↑ "Harrah's says it has approval for buyout", CNN Money
10. ↑ 2006 HET 10-k,Item 1A Pg. 12
11. ↑ 2006 HET 10-k,Item 1A Pg. 9
12. ↑ 2006 HET 10-k,Item 1A Pg. 10
13. ↑ "Historical Economic Data for Metropolitan Las Vegas", Center for Business and Economic Research, University of Nevada, Las Vegas
14. ↑ "Tiny Macau Overtakes Vegas Strip", BBC News
15. ↑ "Metropolitan Las Vegas Tourism Statistics", Center for Business and Economic Research, University of Nevada, Las Vegas
16. ↑ 2006 HET 10-k,Item 1 Pg. 7
17. ↑ 2006 LVS 10-k,Item 1 Pg. 1
18. ↑ 2006 WYNN 10-k,Item 1 Pg. 2
19. ↑ 2006 WYNN 10-k,Item 1 Pg. 3
20. ↑ 2006 MGM 10-k,Item 1 Pg. 1
21. ↑ BYD 10-k, Item 1 Pg. 1
22. ↑ 2006 HET 10-k,Item 1A Pg. 14-15