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Harrah’s Drops IPO Plan

Posted on November 20th, 2010

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The lackluster performance of the casino industry, caused mainly by the economic depression, will yet again be dealt another losing hand. Casino company Harrah’s Entertainment Inc. , the world’s largest casino operator, pulled the plug on its plan for an initial public offering of $500 million which was supposed to happen last Friday. The move may have made the path of other private equity-backed companies that are looking to join the stock market in the United States uncertain. The deteriorating economy has caused extensive damage to the casino industry. In fact, a lot of companies connected to it have been transferred from one owner to another because of the high debt loads which could not be handled. Prior to 2008, casino companies relied heavily on loans, which are now hurting them.

Like most casino companies, Harrah’s has also been trying to restructure its debt. In the first part of 2010, the company issued new notes specifically made to ease its ballooning debt that would be maturing in 2010 and in 2011. In August, Harrah’s, currently controlled by Apollo and TPG Capital, filed for the IPO. Harrah’s, which announced a change of name to Caesars Entertainment Corp. with its IPO announcement, has since 2008, been experiencing a steep decline in its financial position along with the global financial crisis. In the third quarter of this year, the company posted a net loss of $165 million.

The official decision to stop the bid of the casino giant to become public comes as private equity companies are looking for ways to get rid of portfolio companies they have acquired during the heat of the buyout boom from 2005 to 2007. For example, private equity-backed hospital operator HCA Inc, Toys R Us and Nielsen Holdings, whose viewership ratings often determine the fate of TV shows have all been attempting to go public by filing with U. S. regulators to list themselves as publicly-traded companies in the United States. The current market for new issues in the country is very busy. Last Thursday, General Motors Co. , which used to be a blue chip stock, marked its return to Wall Street by extending a $20. 1 billion offering, the biggest in the history of U. S. IPOs. However, investors have usually been quite suspicious of companies backed by private equity, because it means that these companies usually have higher amounts of debt.

David Menlow, president of IPOfinancial. com, an independent research firm, said that Harrah’s has a big leverage, so it stood out from the rest of the IPOs. The net tangible book value of the company before the IPO was a negative 27. 74 cents, according to Menlow. He added, “The debt structure of the company was a little too much for investors to handle.”. Sources that claim to be insiders to the matter have told the press on Thursday that the listing of about 9. 3 percent of Harrah’s would not push through, with the main reason being that there are huge concerns about the price range of the IPO at $15 to $17 a share. It has been deemed quite steep by potential investors.

The following day, the casino company released a statement that announced that the IPO will not go through as planned. The statement cited impossible market conditions. Analysts also noted that their theory of private equity-backed offerings getting less than warm reception may have been proven correct yet again. It has been observed that recently, the IPO market has been unfriendly towards companies that are private equity-backed and offering their initial stocks. Cases of these are NXP Semiconductors NV, a Dutch chipmaker that had been backed by private equity firms including KKR and Bain. The company debuted its IPO in August, and has since then experienced a 7. 9 percent dip from its initial price.

Menlow also mentioned that the absence of any Harrah’s business in Macau may also be another reason why it has been suffering too much. This is in comparison with other companies such as Sands Las Vegas, which has a thriving Macau facility, causing the company to keep afloat amidst the poor performance of the industry all across.