Monday, December 18, 2006

More On Harrah's

So, we continue to get leaked information fed to us from the Wall Street Journal regarding the Harrah's (HET) buyout. The WSJ reports that the company's Board of Directors will be voting on the deal tomorrow, and a formal announcement should be expected as early as tomorrow. The paper is currently saying that the deal is for $90 a share. I guess I got a bit lucky when I picked out an acceptable-to-the-board buyout price in this post in November.

Anyway, what's the plan? Once the announcement is actually made by the company, I will be looking to exit. I'm not willing to wait for the deal to close for cash. Had the buyer been Penn National Gaming (PENN) and the deal was stock based, then I'd have to make a more difficult decision. As it stands, the answer is for me to exit. The question now becomes... at what price?

I'm going to make a list of some assumptions that I think are reasonable. Note that I am not sure how off I am to reality, so keep that in mind. Here we go.

1) It's a cash buyout at $90 a share.
2) Deal closes a year from now.
3) Deal carries a 2% risk premium.
4) There isn't any more investor hope for higher bids.

So, today's risk-free 1 year rate is 5%. Tack on a 2% risk premium, and we are looking at a total of 7% that should be made up in the next year. This translates to around $84 a share in today's terms. Maybe the deal risk is overstated by me. At 1% premium, we are closer to $85 a share. If my assumptions are anywhere near the actual values, then I guess I'm looking to exit right around $84-85. If I see any sort of significant pop past that, I'll call it a windfall and get out as soon as possible.

This might be an easy question compared to the follow-up... where should I deploy the funds from selling my shares. HET is one of the larger positions in the Long-Term Portfolio, and so it will provide me with the opportunity to fund a new position or two, as well as increase the size of existing ones. I'll keep you all posted.

No comments: