Let the yard sales begin. To avoid antitrust concerns surrounding its $5.2 billion merger, Harrah's Entertainment ( HET) and Caesars Entertainment ( CZR) are laying plans to sell four casinos in Chicago, Tunica, Miss., and Atlantic City, N.J. But with the Federal Trade Commission and a number of state regulators closely eyeing the merger, as well as the one between MGM Mirage ( MGG) and Mandalay Resort Group ( MBG), analysts say there could be more properties put on the block. On Tuesday, Harrah's confirmed a report that it was in discussions to sell Harrah's East Chicago, Harrah's Tunica, the Atlantic City Hilton and Bally's Tunica to a group led by Colony Capital, which owns the Las Vegas Hilton and other casino properties. Interest in the properties is high. At least two other buyers are interested in assets, including one of the small-cap gaming operators, but Colony has exclusive negotiating rights. "If Colony seals the deal, the yard sale would be 'picked over' but probably not finished," said David Vas, analyst at Banc of America Securities. "We would still not be surprised to see additional properties offered in markets such as Atlantic City, Tunica, Rena, Laughlin and Lake Tahoe, as well as Detroit and possibly Las Vegas." (Bank of America does and seeks to do business with the companies covered in research reports.) Analysts expect a wave of casino sales in the coming year as both Harrah's and MGM try to comply with the FTC. Last week, the FTC made a second request for information about the Harrah's Caesars merger, which would create the world's largest gaming operator, just weeks after making a second request on the MGM Mandalay merger, which would create the second-largest gaming operator. Harrah's pre-emptive move to divest assets is seen as a good sign that its merger may win approval without having to sell off too many properties. In reaction, shares of Harrah's rose $1.12, or 2.4%, to $48.40, while Caesars rose 56 cents, or 3.8%, to $15.48.
"We believe this sale would be a positive for Caesars, since it would increase the chance that the pending acquisition by Harrah's would go through," said Robin Farley, gaming analyst at UBS. "Harrah's and Caesars will be required to divest a number of properties, including these four, in order to get regulatory approval." (UBS does and seeks to do business with the companies covered in research reports.) Not only does the deal remove some potential stumbling blocks to approval, it looks like Harrah's and Caesars would profit from the deal. According to reports, Colony is offering $1.3 billion for the four casinos, implying a valuation of 8.5 times 2004 EBITDA, which is well above Wall Street expectations. -- UBS expected the assets to fetch six times EBITDA, while Lehman Brothers expected a ratio of 6.7.
But with the details of the purchase yet to be locked in, Lehman analyst Felicia Kantor Hendrix cautioned that the premium that Colony appears to be paying for the properties could be artificially inflated. "It is difficult to imagine that a savvy financial buyer like Colony would be willing to pay 8.5 times for a portfolio of four non-Nevada casino assets, two of which are located in Tunica," said Hendrix, in a research note. "There could be land value and other payments involved which effectively lower the transaction multiple to more reasonable levels." (Lehman Brothers does and seeks to do business with the companies covered in research reports.)