The plan will in no way affect its impending takeover by two private equity firms. Texas Pacific Group and Apollo Management Group are shelling out $17.1 billion and assuming more than $10 billion in debt to acquire the world’s largest gaming company as measured by revenue.

Splitting the company in two will allow the company to more effectively leverage the value of its real estate holdings while also getting involved in long term management contracts. For example, should the company choose to sell a specific property such as the Showboat Atlantic City, it could strike a deal to continue to run the property for a fee while also cashing out the full value of the asset.

In the lodging industry, the largest industry players have been dumping real non essential real estate for a decade as they transform themselves into management companies. For public companies, this has been a boon as major brands like Marriott and Hilton Hotels Corporation have been able to cash in on a financial windfall by selling property. The cash heads straight to the bottom line without affecting each organization’s distribution.
When Harrah’s becomes private it will allow the ownership to sell the casinos to cash out of certain markets and generate funds. The company can then use the cash flow to either pour into new assets to expand the company or pay down debt.  And since Texas Pacific Group and Apollo Management Group are shelling out about $28 billion (including debt), the extra cash will be much needed.

 

Harrah’s has been hatching this plan for about a year now,  according to a regulatory filing, which said the company “met and had various exploratory discussions with representatives of [Texas Pacific Group] regarding the feasibility and potential value of separating the company’s real estate assets and business operations into separate businesses.” However the plan was shelved soon after. Interest was renewed this past summer as talks between Harrah’s and the investors heated up.

In the SEC filing, the company says that on, or prior to, the closing of the merger, “the surviving corporation will likely implement an ‘OpCo/PropCo’ structure such that the [property companies] will be owned by one or more intermediate subsidiaries of Harrah's, as will operating companies that will operate the assets of the [property companies].”

In other Harrah’s related news, CEO Gary Loveman will get a massive payout when the deal is closed. Once he is paid off on stock options and other rights he’ll be taking home $94 million.

According to documents filed with the Securities and Exchange Commission (SEC), Loveman would pull in $80.3 million, stock appreciation rights worth $8.8 million, and restricted shares worth $4.9 million, according to the proxy statement filed last week. Each share of Harrah’s will be sold for $90, once shareholders approve the sale agreement.  Shares were trading this week on average for about $85 a share.

Loveman is not expected to exit the company after the sale, and will probably take an undisclosed position with the new organization. It’s likely he will remain as the company’s chief operations executive.

Currently, Harrah’s makes about $2.4 billion a year and owns some of the most well known casino hotels under the Harrah’s, Caesars and Horseshoe brands.

Penn National Gaming came close to winning the bidding war for Harrah’s, but a special committee formed by Harrah’s to evaluate buyout offers felt their offer -- though on par financially – had too many other conditions which could hamper the likelihood of it getting shareholder and regulatory approval. Loveman was not a part of that committee which was formed last September.

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