Holding on to Biloxi
Harrah’s not likely to shed casino here
BILOXI - The private equity groups buying Harrah’s Entertainment may sell off properties to lower their debt, but they will probably hold on to Biloxi, according to casino analysts.
It boils down to taxes.
The percentage that Mississippi takes off the top is significantly smaller than most other states with gambling. In addition to that, the federal government offers big deductions for investment on the Coast.
The Gulf Opportunity Zone Act, which is intended to spur rebuilding after Hurricane Katrina, allows casino companies to deduct up to 50 percent of the cost of a hotel or other building in its first year of service. President Bush signed legislation Wednesday that extends the deduction two years until Dec. 31, 2010.
The new owners, Apollo Management Group and Texas Pacific Group, are expected to keep the current management of Harrah’s in place. Harrah’s is buying land around its Grand Casino Biloxi where it plans a major investment. The company sold its Gulfport property and then bought the property of a competitor in Biloxi.
“They’ve kind of doubled down on Biloxi,” said Matt Sodl, managing director of Innovation Capital.
Harrah’s has put the Biloxi expansion on hold and not said when it plans to go forward with any development. The company’s market share on the Coast is significantly less than what it was before Hurricane Katrina when it operated two larger casinos. The extension of the federal tax credit increases the likelihood of an expansion. On the other hand, the higher debt load could stifle new investment.
“The way they operate their properties is not going to change,” Sodl said. “They will probably be a little longer-term oriented. Their management strategy is not going to change. I think their gaming product may evolve.”
However, he cautioned that the debt taken on with the buyout is on the “high side,” which usually results in the sale of assets. One factor Harrah’s is likely to look at is where its casinos overlap. Besides the Biloxi Grand, Harrah’s also owns three casinos in Tunica as well as others in New Orleans and Bossier City, La.
“I think it’s going to be a function of looking at the asset base, seeing if there is overlap between the properties they have in a market, shedding those they don’t think have the right growth potential or the quality level they might want to have going forward. They may sell an asset or two. It’s hard to look at it and say this asset is going to be sold based on what I know today.”
Joe Weinert, vice president of Spectrum Gaming Group, said the management of Harrah’s is more likely to sell Midwest properties where states assess higher tax rates.
“I think that Harrah’s is going to be committed to concentrating its capital in Las Vegas, Atlantic City and the Gulf Coast because all those are or will be hub markets where they enjoy by far the best tax rates,” Weinert said.
The three markets also offer geographic diversity, he said.
“Harrah’s was very bullish on the Gulf Coast post-Katrina,” Weinert said. “I don’t see any reason why they would change that.”
No one outside of Harrah’s and maybe not even the company’s top management really knows what properties might be sold to reduce debt. A report issued by Susquehanna Financial Group speculated that the company would shed non-core assets, such as the Rio in Las Vegas, the Showboat in Atlantic City and others. Private equity groups will be more patient longer term for investment results than shareholder investors, according to the analysts, which could translate into a period of stability once the ownership changes settle out.