My comments on the recent Harrah’s purchase in the LVRJ were a combined Planet Hollywood/Ohio racetrack thought:
David Schwartz, director of the University of Nevada, Las Vegas' Gaming Research Center, said that the “common sense and intuitive response” would seem to be to ask why a company carrying $19.3 billion in debt is “buying more stuff.”
Especially, he added, since “the events of the past year, dating from the collapse of Lehman Brothers, kind of validates people who go by common-sense judgments.”
Jan Jones, Harrah's senior vice president of communications and government relations, however, said company executives believe the current economic environment is providing opportunities for cash-smart investments such as the company's expansion into Ohio's gaming market.
“We're always going to keep ourselves, within reason, in a position where we would be able to take advantage of the opportunities that become available with the right economics,” Jones said. “Taking advantage of good economic opportunities is always in the company's best interest.”
via MERGERS AND ACQUISITIONS: Harrah’s buys Ohio racetrack – Business – ReviewJournal.com.
I think we’re both right (of course I’m biased). While I can see, in theory, that a $42 million investment today may yield healthy cash flow in a few years, which would put the company in a better place financially, I stand behind my assertion that the common-sense reaction to the news–that you don’t buy when you’re already heavily in debt–should at least be considered.
This isn’t just about the racetrack deal, but a more general comment about leverage in the gaming industry. While many industries use varying amounts of leverage in the normal course of their financing, it should be clear that highly-leveraged casinos companies have run into trouble over the past year.
Similarly, it’s interested that the “deconsolidation” trend has not just halted, but actually reversed, if the Planet Hollywood debt acquisition leads to something. I’m challenged to see what Harrah’s would do with another 3,000 hotel rooms, particularly since they already have options at most price points, from IP to Caesars Palace.
It’s like playing poker–going all in with pocket kings is brilliant if your opponent winds up having 2/7 off suit (and neither twos nor sevens show up with the community cards). It seems idiotic, though, when you find out your opponent had pocket aces. In other words, I’m beginning to suspect that there are just too many factors outside of the control–or even perception–of most corporate decision makers to make any but the most conservative decisions “risk free.”