Private Equity Firms Eye Shaky IPO for Harrah's (LVS, WYNN, MGM, MPEL, BYD)

Last week private equity firms Apollo Management LP and TPG filed documents with the US Securities and Exchange Commission for an IPO of Harrah’s Entertainment Inc., the gaming firm the two firms purchased in 2008. At the time, Apollo and TPG each anted up $1.325 billion for a 23% stake each in Harrah’s, and added another $12 billion in debt to pay for the deal, according to The Wall Street Journal.

The SEC filing comes as some signs of life reappear in the casino business. Las Vegas Sands Corp. (NYSE: LVS)and Wynn Resorts Ltd. (NASDAQ: WYNN) both beat EPS expectations in the June quarter. The not-as-good news is that MGM Resorts International (NYSE: MGM) and Melco Crown Entertainment Ltd. (NASDAQ: MPEL) missed June quarter forecasts. Boyd Gaming Corp. (NYSE: BYD) reported weaker-than-expected EPS this morning although the company did beat revenue expectations.

Harrah’s IPO filing did not disclose either the amount of stock to be sold or the expected pricing of the stock, but the offering is expected to raise about $575 million. The test here is whether or not private equity firms can beat down investors’ doors. Apollo and TPG bought Harrah’s at a market peak, and even though Harrah’s has cut $500 million in costs, the company allowed hedge fund Paulson & Co. to take on $710 million in Harrah’s debt in June for about $470 million. That implies a value for Harrah’s of $4.7 billion.

If the Apollo and TPG cash out in an IPO, each would lose at least $200 million, according to the WSJ. Proceeds from the IPO would not be used to pay down debt, but would go instead to complete unfinished projects in the US.

And that’s another part of the problem for Harrah’s. The company lacks a presence in Macau, currently the global hot spot for building casinos and resorts.

Harrah’s has pushed the US Congress to allow internet gambling, and it may be getting somewhere with that campaign.  Without a Macau location or the ability to leverage its World Series of Poker on-line, Harrah’s may have a tough time convincing investors that it is worth the risk.

The outlook for casinos is improving slightly, so that may help the Harrah’s IPO. Fitch Ratings recently upped its outlook for MGM to “positive” after the company’s announcement of a follow-on offer to raise $595 million.

But the rosier future might not include Harrah’s, which would still hold about $20 billion in debt after the IPO. Apollo and TPG would not sell all their stakes at the IPO, probably hoping that they will be able to recoup more if they stay in the game. Now that’s high stakes poker.

Paul Ausick