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TheStreet Open House

Harrah's Gambles Big

Judging by Wall Street's initial reaction to Harrah's Entertainment's (HET) plan to buy Caesars Entertainment (CZR - Get Report) in a cash-and-stock deal valued at $5.2 billion, the move is a gamble -- with Harrah's standing to lose as much as it has to gain.

The transaction would create the world's largest casino operator with 56 casinos in nearly every gaming market in the U.S. Under the terms of the deal, released on Thursday, Caesars will receive $1.8 billion in cash and 66.3 million shares of Harrah's common stock, while Harrah's will assume $4.2 billion in Caesars' debt. Based on the closing price of Harrah's shares Wednesday, the transaction values Caesars common shares at $16.96, a 23% premium from where shares closed Tuesday.

"This acquisition will solidify Harrah's position as the pre-eminent distributor of casino entertainment," said Gary Loveman, Harrah's president and CEO. "We are adding attractive assets in stable markets with outstanding long-term growth prospects where we have a demonstrated record of success. Our network will also be enhanced as Caesars provides us access to new markets and new customers."

But since news of the deal first surfaced Wednesday, analysts questioned its rationale, unsure that bigger is necessarily better. In research notes, Prudential Equity Group said "we don't like the combination," while Goldman Sachs questioned "the strategic reasoning behind the potential acquisition." (Prudential has no equity banking business, while Goldman Sachs does and seeks to do business with the companies covered in research reports.)

Shares of both companies were off more than 4% on Thursday, once the deal became official. Harrah's fell $2.23, or 4.4%, to $48.75, while Caesars dropped 64 cents, or 4%, to $15.36 after Fulcrum Global Partners and Prudential Equity Group downgraded the company, saying it was fully valued after rising 15% on Wednesday. (Fulcrum does and seeks to do business with the companies covered in its research reports.)

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