Harrah’s Entertainment Inc., the world’s biggest casino owner, expects to list some shares publicly in coming months because of the deal owners Apollo Management LP and TPG struck with billionaire John Paulson.

Paulson won the right to be the first equity holder to register and may publicly sell his stock as part of his hedge fund’s $710 million swap of debt for equity with Las Vegas-based Harrah’s, according to the June 3 investment agreement. Once approved by regulators, Paulson’s 9.9 percent stake will be registered on the New York Stock Exchange or Nasdaq Stock Market “within a matter of months,” Harrah’s Chief Executive Officer Gary Loveman said in an interview.

Leon Black’s Apollo and TPG, run by David Bonderman, joined forces in January 2008 to buy Harrah’s in a $30.7 billion deal - - the biggest casino buyout -- just as the gambling industry plunged into record declines. After trimming about $4 billion of debt through discount deals with banks and exchanges with creditors, Harrah’s offered Paulson new equity in the company for his debt, with rights other shareholders don’t have.

“This puts Paulson in the driver’s seat” because his hedge fund, New York-based Paulson & Co., can push Harrah’s to register his shares faster than other investors may have preferred, said Steven Kaplan, a professor at the University of Chicago’s Booth School of Business.

The agreement with Paulson, who bought some debt at distressed levels, marks a shift in efforts to salvage the company from debt restructuring and cost-cutting to equity capital and growth.

‘Positively Received’

“There are investors in this company that have written the equity to zero,” said Loveman, who is also Harrah’s chairman. “This transaction has been uniformly, positively received” because it reduces the debt load and is a “demonstration of confidence in the company’s future,” Loveman said.

Apollo and TPG, two of the world’s biggest private-equity firms, have helped reduce Harrah’s balance sheet over the past 19 months with deals that exchanged bonds for new discounted notes, paid down loans for a fraction of principal, amended lender agreements and extended key maturities through 2015. It also trimmed almost 21 percent of the workforce and slashed spending to prevent declining revenue from decimating cash flow.

Paulson’s fund is the second-biggest shareholder in MGM Resorts International, after founder Kirk Kerkorian, and the fourth-largest owner of Boyd Gaming Corp., investments he disclosed in May. As part of his bet on a U.S. economic recovery, Paulson has also invested in Bank of America Corp. and Citigroup Inc., two of the three largest U.S. banks.

A spokesman for Paulson declined to comment on the firm’s plans for its Harrah’s investment. Apollo and TPG also declined to comment.

Other Investors

Harrah’s owners will decide “what other equity among the equity now in private hands” may also be registered along with Paulson’s, Loveman said. “Whatever that turns out to be, it would represent a very small minority of the total equity ownership of the company that would be traded publicly.”

Once casino and securities regulators have approved Paulson’s stake, “there’s a clock that starts that says from that point forward at some point there has to be a listing that allows him to exit if he wishes,” Loveman said, adding the period was “measured in months.”

Harrah’s, whose brands include the Caesars, Harrah’s and Horseshoe casinos, the World Series of Poker and London Clubs, was the first casino company listed on the New York Stock Exchange in 1973, two years after its public trading debut on the over-the-counter market.

Bingo Parlor

Founded by Bill Harrah as a bingo parlor in Reno, Nevada, in 1937, Harrah’s today operates 52 properties in seven countries, becoming the world’s biggest casino company largely through acquisitions. Harrah’s was bought by Holiday Inns Inc. in 1980, spun off as part of the Promus Companies in 1990, and spun off again as Harrah’s Entertainment in 1995. A series of acquisitions including Showboat Inc., Players International Inc., Harveys Casino Resorts and Horseshoe Gaming Holding Corp. culminated in the $9.3 billion takeover of Caesars Entertainment Inc. in June 2005.

Paulson’s deal, which exchanges $710 million in Harrah’s bonds he bought at a discount for the equity stake, together with Apollo and TPG’s swap of $408 million notes for about 5.6 percent new equity as part of the same deal, suggests a Harrah’s equity value of about $7.2 billion.

Public Price

Harrah’s equity holders currently value their stakes in the company based on marks provided by Apollo or TPG, Loveman said. If Paulson’s shares began to trade, “there would be a public market equity price that they would have to take into consideration.”

“I don’t think anybody’s put off by that,” Loveman said.

Harrah’s was taken private by Apollo and TPG in a deal first struck in December 2006 and closed in January 2008, adding $12.9 billion of debt.

Within months of the buyout, Harrah’s said it would pay interest on $1.5 billion of loans and bonds with more debt through a so-called payment-in-kind feature. In December 2008, it asked bondholders to swap debt at a loss or risk seniority.

Last year, Harrah’s succeeded with a second distressed bond exchange, issued notes as markets rallied in June and September to repay other borrowings, borrowed $1 billion to tender for near-maturity debt at a discount and bought back some mortgages for 25 cents on the dollar.

This year, the company extended maturities on another $5.5 billion of loans. The measures cleared all significant maturities through 2015, giving the company about $3 billion in cash and available credit to expand.

‘More Creative’

“Harrah’s has certainly been more creative than some other gaming companies in reducing its debt,” said Robert LaFleur, who covers casino companies at Hudson Securities. “They avoided bankruptcy and may now be in a position to take advantage of acquisition opportunities.”

Loveman scooped up Planet Hollywood Resort & Casino from default in February, giving Harrah’s a Las Vegas Strip property neighboring its other resorts for less than it would cost to build. He also bought an Ohio racetrack ahead of legalized slots and has “dusted off” plans for a Strip retail development featuring a giant Ferris wheel. Harrah’s is seeking to expand in Massachusetts and Macau, China, and has sought bids this year for its Rio All-Suite Hotel & Casino in Las Vegas.

Note Prices

The credit crisis proved lucrative in another way to Apollo and TPG. The funds profited by trading debt in Harrah’s and other portfolio companies separate from their restructuring maneuvers. Harrah’s $470.5 million of 10.75 percent notes due in 2016, which fell as low as 13 cents on the dollar as junk collapsed in February 2009, are now trading at 80.6 cents, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

“They’ve done very well out of it,” Loveman said. Harrah’s was “never” at risk of bankruptcy, and the market panic created rare opportunities to eliminate debt, he said.

“You file Chapter 11 because you run out of money, but we never came anywhere near running out,” Loveman said. “There would be no reason on earth why you would do that unless you had no possible alternative. We had hundreds of alternatives.”

Source: www.bloomberg.com

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