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Harrah’s Entertainment Inc.(HET) proposed acquisition of Caesars Entertainment Inc.(CZR)

Harrah’s Entertainment Inc.(HET) proposed acquisition of Caesars Entertainment Inc.(CZR). Natali Alonso Tim Earnshaw Chris Graham Jeremiah Pitts. Contents. Right Company The Players / Current Industry Environment / Strategic Rationale Right Price, Right Deal

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Harrah’s Entertainment Inc.(HET) proposed acquisition of Caesars Entertainment Inc.(CZR)

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  1. Harrah’s Entertainment Inc.(HET) proposed acquisition of Caesars Entertainment Inc.(CZR) Natali Alonso Tim Earnshaw Chris Graham Jeremiah Pitts

  2. Contents Right Company • The Players / Current Industry Environment / Strategic Rationale Right Price, Right Deal • Deal Description / Valuation + Pricing / Deal Financing Right Chance of Success • Negotiations / Governance / Integration Conclusions / Recommendations

  3. Right Company The Players Harrah’s Entertainment Inc. • Highly acquisitive • 2003 revenues of $4.3B • Industry leaders in CRM • Focus on slots Caesars Entertainment Inc. • Premium brand within the industry • 29 Casino resorts located internationally • 2003 revenues of $4.5B • Focus on card games and entertainment

  4. Right Company Current Industry Environment • Consolidation of gaming industry continuing • Industry becoming more corporate, private companies selling up • MGM Mirage (MGG) just recently announced a friendly takeover bid for Mandalay Resort Group (MBG) • HET would regain the #1 position with CZR acquisition • If both transactions are approved, then # majors will have reduced from 6 to 2 since 1996

  5. Right Company Strategic rationale • Economies of scale • Scale presents more opportunities and provides financial resources to be able to capitalise on them • HET can improve operational performance at CZR • Expand HET assets in stable regulatory markets • Expand HET assets in growth markets where presence limited • Leverage HET CRM capabilities for better returns from combined customer base Right Company

  6. Right Price, Right Deal Deal Description • July 15th, 2004, Harrah’s Entertainment Inc. (HET) offered to buy Caesars Entertainment Inc. (CZR) for $9.44B (including $4B in debt) • Agreed terms represent premium of 27% over previous close • Payment in cash ($1.8B) and stock (66.3M shares) • Both companies’ Board of Directors have approved the friendly takeover • Break-up fee of $180M, seats on combined board for CZR

  7. Right Price, Right Deal Valuation / Pricing • Different methodologies used to value firm: • Comparable Companies • Comparable Transactions • Discounted Cash Flows • Replacement Value • Liquidation Value • Most relevant methods indicate a price range from $9B to $11B. • Transaction price for CZR is for $9.44B, indicating a fair value.

  8. mv:fc mv:bv 1.0 1.0 1.0 1.0 1.0 1.0 10.0 10.0 10.0 10.0 10.0 10.0 15.0 15.0 15.0 15.0 15.0 15.0 20.0 20.0 20.0 20.0 20.0 20.0 30.0 30.0 30.0 30.0 30.0 30.0 mv:rev mv:EBITDA mv:empmpn mv:prop High Min.US$7.7B Low Max.US$8.3B Avg.US$9.1B WAvg.US$10.0B - Range Right Price, Right Deal Comparable Companies Valuation Diagram

  9. Avg.US$11.3B WAvg.US$12.2B Revenue ($B)Comparison 7.0 7.0 10.0 10.0 11.5 11.5 13.0 13.0 16.0 16.0 EBITDA ($B)Comparison WAvg.US$11.6B Avg.US$10.6B - Range Right Price, Right Deal Comparable Transactions Diagram

  10. Right Price, Right Deal Deal Financing • Cash ($1.8B) and Stock (66.3M shares) payment, assuming CZR debt • Cash component attractive to CZR shareholders • Limits overpaying for CZR assets • Limits pressure on Free Cash Flows • HET doesn’t have cash on hand • Potential dilutive effects for HET shareholders (CZR shareholders receiving 37% equity stake in firm) • Potential negative implications for credit rating Right Price, Right Deal

  11. Right Chance of Success Negotiation • No public dissemination of negotiations Characteristics affecting negotiations • CZR’s recent poor performance • Both companies want to maintain their status as a significant player in the gaming industry • Break-up fee of $180 indicates their commitment to the proposed merger • Merger is conditional pending undisclosed number of CZR directors joining the HET board

  12. Right Chance of Success Governance • Appeasing regulators evidenced by CZR and HET conducting pre-emptive dispositions of casino operations in concentrated areas • Consensus is that regulators must consider both mega-mergers in conjunction rather than separately – won’t approve one, not other • Effective communication and strong commitment to amicable relations with regulators are imperative. • Most employee redundancies likely in mid-senior level management within CZR, thus most employees won’t be affected • Commitment to Caesars brand declared

  13. Right Chance of Success Integration • HET has extensive experience in integrating previous acquisitions into their fold • Integration risks arise if business is interrupted longer than anticipated • Priority must be given to focus on integrating areas of with the most value first • Cooperation and planning under way before approval of the merger has been given Right Chance of Success

  14. Harrah’s Entertainment Inc. Conclusions / Recommendations • Regulatory approval is the biggest issue facing the deal but industry observers think deal rejection highly unlikely • Integration challenges, whilst significant, are surmountable • Market Reaction • Right Company • Right Price, Right Deal • Right Chance of Success Proceed to completion

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