LAS VEGAS -- Casino giant Harrah's Entertainment Inc.'s debt load will nearly double and its priority will shift to paying it down instead of reinvesting in growth after one of the biggest leveraged buyouts ever, according to SEC documents filed Wednesday.Nearly lost in the excitement of this enormous deal is number of check marks and where they are. Everyone has been focused on rising share prices of these deals and the credit expansion that is taking to get them done, while ignoring the other side of the equation: massive debt, over leverage, and diminishing prospects of future expansion.
Harrah's Chief Executive Gary Loveman told key employees that the company's debt would rise to $21 billion, or eight times operating profit, from the current multiple of 4.7, after being bought by Apollo Management Group and Texas Pacific Group, according to a presentation he made Tuesday after the deal was announced. Other Securities and Exchange Commission filings show Harrah's current debt is $10.7 billion.
Equity in the company will shrink from more than $14 billion to $7 billion, SEC documents show. One slide from Loveman's presentation was titled: "With high initial debt levels, capital allocation priorities will likely change."
Harrah's historical priorities show two check marks beside "reinvest for growth" and "mergers and acquisitions," but only one beside "share repurchases" and "reduce debt." Under the new structure, only one check mark goes toward reinvestment and acquisitions, while two appear beside reducing debt.
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The transaction for Harrah's, excluding debt, ranks as the seventh-largest leveraged buyout ever, according to Thomson Financial. The largest was RJR Nabisco Inc.'s $25 billion acquisition by Kohlberg Kravis Roberts & Co. in 1998.
Once the deals are all signed sealed and delivered, someone is going to have to figure out how to pay back that debt. In other words: "credit contraction".
On Minyanville today Professor Bennet Sedacca citing Ned Davis research reported: Credit exposure relative to risk based capital by the top 5 banks rose to a record 433.5%. Am I the only one that senses a future changing priority of banks away from ever increasing credit exposure?
What about consumers? You can already see a shift away from buying condos, second homes, furniture, appliances, remodeling, etc. Consumers are cutting back. Willingness to take on more debt and ability to take on more debt have changed. Those problems are highlighted in decreasing profits at Circuit City, cutbacks at Home Depot, and UPS. Where is the need to expand?
Bankruptcies and foreclosures are massively rising, in some states as much as 300%. That is forced credit contraction. And as priorities of consumers and businesses shift away from expansion and risk towards risk avoidance and debt paybacks, we are of course talking about a shift from inflation to deflation. We are right there right on the cusp and "changing priorities" will seal the fate.
Note: Changing priorities will be one of the subject of tonight's podcast on Howe Street. Ironically enough, it was changing priorities that caused this delay from our normal Wednesday schedule. Tune in and find out.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
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