Harrah's Entertainment

 
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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.



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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

Illinois

Indiana

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]

Location Type of Casino Casino Space (Sq. Ft) Slot Machines Table Games Hotel Rooms & Suites
Atlantic City, New Jersey
Harrah’s Atlantic CityLand-based 147,1003,7101101,630
Showboat Atlantic CityLand-based 124,2003,4101101,330
Bally’s Atlantic CityLand-based 225,8005,3902101,740
Caesars Atlantic CityLand-based 140,0003,1601601,140
Las Vegas, Nevada
Harrah’s Las VegasLand-based 90,0001,5901002,530
RioLand-based 107,0001,2501102,520
Caesars PalaceLand-based 129,0001,4202003,350
Paris Las VegasLand-based 85,0001,1901002,920
Bally’s Las VegasLand-based 66,4001,240602,810
Flamingo Las Vegas(b)Land-based 76,8001,3401203,530
Imperial PalaceLand-based 75,000890502,640
Laughlin, Nevada
Harrah’s LaughlinLand-based 47,000970401,510
Reno, Nevada
Harrah’s RenoLand-based 57,00092050930
Lake Tahoe, Nevada
Harrah’s Lake TahoeLand-based 57,60087080530
Harveys Lake TahoeLand-based 63,30090090740
Bill’s Lake TahoeLand-based 18,00025030
Chicago, Illinois area
Harrah’s Joliet (Illinois)(c)Dockside 39,2001,19020200
Horseshoe Hammond (Indiana)Dockside 48,3002,01060
Metropolis, Illinois
Harrah’s MetropolisDockside 31,0001,18030260
Southern Indiana
Caesars IndianaDockside 87,0001,950110500
Council Bluffs, Iowa
Harrah’s Council BluffsDockside 28,0001,03030250
Horseshoe Council Bluffs(e)Greyhound racing facility and land-based casino78,8001,86070
Tunica, Mississippi
Horseshoe TunicaDockside 63,0001,830100510
Grand Casino TunicaDockside 136,0002,180901,360
Sheraton Casino & HotelDockside 31,0001,10040130
Mississippi Gulf Coast
Grand Casino Biloxi(f)Dockside 27,60080030490
St. Louis, Missouri
Harrah’s St. LouisDockside 120,0002,84090500
North Kansas City, Missouri
Harrah’s North Kansas CityDockside 60,1001,79060390
New Orleans, Louisiana
Harrah’s New OrleansLand-based 125,1002,080120450
Bossier City, Louisiana
Louisiana DownsThoroughbred racing facility and land-based casino14,9001,370
Horseshoe Bossier CityDockside 29,9001,59060610
Chester, Pennsylvania
Harrah’s Chester(g)Harness racing facility and land-based casino92,0002,750
Phoenix, Arizona
Harrah’s Ak-Chin(h)Indian Reservation 48,00095030150
Topeka, Kansas
Harrah’s Prairie Band(h)(i)Indian Reservation 34,9001,16030300
Cherokee, North Carolina
Harrah’s Cherokee(h)Indian Reservation 88,0003,38040580
San Diego, California
Harrah’s Rincon(h)Indian Reservation 69,9001,60070650
Punta del Este, Uruguay
Conrad Punta del Este Resort and Casino(j)Land-based 44,50050070300
Ontario, Canada
Casino Windsor(k)Land-based 100,0002,51080390
United Kingdom
Golden NuggetLand-based 5,4003040
Rendezvous CasinoLand-based 6,2002040
The SportsmanLand-based 5,2001050
Fifty(l)Land-based 2,70020
Rendezvous BrightonLand-based 9,0005070
Rendezvous Southend-on-SeaLand-based 8,7003070
Manchester235Land-based 11,50040100
Egypt
London Club Cairo-Nile(h)Land-based 2,3004010
Rendezvous Cairo-Ramses(h)Land-based 2,7003020
South Africa
Emerald Safari(m)Land-based 37,70066020190
GRAND TOTAL2,997,80067,0603,29038,060

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
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