2 CARDS

Just one day after General Motors has bellowed back onto the US stock market, Harrah’s Entertainment, has pulled its $500m (£313m) flotation plan. This company owns the UK chain London Clubs International, in the US this is Caesars and they are the largest casino company in the world. The planned flotation was to partly fund expansion projects in land based casinos for both Cincinnati and Cleveland and for the conclusion of a partially complete project of a 660-room hotel tower in Las Vegas. However they have pulled out citing that market conditions were not conducive to their flotation plans.

This is a huge blow for private equity firms TPG Capital and Apollo who spent $30 billion combined in January 2008, in order to control Harrah’s. The company posted a loss of $187.1 million in their last reported quarter – this is mega bucks! In the meantime Macau has been out gambling Las Vegas by four-to-one and these figures have Las Vegas casino vendors worried. Las Vegas has in the past been the gambling Mecca of the world, but it seems that this is no longer true.

Shares were scheduled to be sold at price of between $15 and $17 each and the flotation would have seen almost 10% of Harrah’s stock sold. Banks which include Credit Suisse, Goldman and Citigroup have been working on the floatation and John Paulson was planning to sell his 30.2m shares. This hedge fund manager was made famous by making billions of dollars during the sub-prime crisis and he had received shares in this company in exchange for Harrah’s owned bonds. Apparently investors did baulk at paying such a high share price and this is also one of the reasons for pulling the initial public offering. Bankers were saying the price was too high taking the circumstance and prospect of Harrah’s into consideration. There is little prospect of economic recovery taking place and the company still remains highly leveraged.

In the meanwhile Harrahs has been strongly in support of going online with casinos, poker rooms and bingo in the US, against strong opposition from most other large US casino operators, the chief antagonist being Wynn. They have in actual fact made some inroads into the UK online casino and bingo market, although this will hardly make a dent in a company which is leveraged to the tune of $30 billion!!

It appears that the only way to make expansion efforts is in actual fact to go online, because the US market in its present legislative structure, certainly appears to be almost completely saturated. Massive casino operators have to be able to expand to avoid reaching critical mass, and this seems to have become quite a problem for Harrah’s.

Apollo and TPG have been able to extend the terms of the buy-out debt, but whether or not Harrahs will survive in such a highly leveraged position remains to be seen. This is a highly complicated financial scenario but apparently post-Thanksgiving, IPO investors may be prodded into taking on greater risk; so it is all a matter of timing at present.