Consolation Prizes

If you love a deal, let it go; part of it may come back to you. Just ask Park Place Entertainment and Comcast.
Roy HarrisJuly 1, 1999

Sometimes opportunity knocks more than once in the world of mergers and acquisitions. But a company must keep listening for it.

Executives from Hilton Hotels Corp.–which was outbid by Starwood Hotels & Resorts Worldwide Inc. for lodging and casino giant ITT Corp. in 1997–were all ears after Starwood claimed its $14.6 billion prize.

First, Hilton spun off its own casino business into Park Place Entertainment Corp., installing former Hilton gaming chief Arthur Goldberg as Park Place CEO, and making Hilton CEO Stephen Bollenbach the new concern’s chairman.

The move “set up Park Place in a growth strategy that involved both acquisitions and internal development,” says Scott LaPorta, who left the post of Hilton treasurer to become Park Place’s CFO.

Then, in April, Park Place seized an opportunity that surprised almost everyone. It agreed to pay $3 billion for a major chunk of Starwood’s new ITT property: the Caesars World Inc. stable of casinos.

Such tenacity is admirable , says Mark Sirower, visiting professor at the University of Pennsylvania’s Wharton School and an M&A expert. “A lot of things happen after there’s an acquisition,” he notes. “There are asset dispositions and spin-offs, and new executives come and go,” potentially creating a fertile time to revisit a deal. “Besides, if a competitor acquires something you were interested in, you definitely want to keep a keen eye on it anyway.”

Acquisitive companies like United Dominion Industries, a broadly based Charlotte, North Carolina, manufacturer, have benefitted from studying alternatives to the deal that never happened. And recently, so did Comcast Corp., of Philadelphia, as it searched for ways to build its cable-television business.

Still, it’s rare that a company returns to pick up some of the pieces after losing a bidding contest, suggests Eugenia Shepard, an analyst with the Mergerstat unit of investment bank Houlihan Lokey Howard & Zukin, in Los Angeles. For one thing, the victor tends to hold the best properties off the market when asset sales begin. “Will things be discarded? Yes,” she says. “But what’s available is often not the same set of jewels you were after.” Plus, in the current active merger environment, “there are so many choices out there already,” she says, “a company doesn’t have to come back to the same table.”

Veni, Vidi, Vici

It is easy to see why Park Place came back to Caesars’s tables.

As Park Place scoped out potential acquisitions, “it was in the back of our minds that Caesars might eventually be available,” Park Place’s LaPorta says. “The executive managers of Starwood were very public about their interest in looking hard at the gaming properties,” and possibly selling them. (A Starwood spokesman says the company had viewed the casino business as a trial situation and felt, a year into the experiment, that Caesars was performing below expectations.) “And it’s not any mystery that we [Hilton] were interested in Caesars when we tried to acquire it as part of the ITT offer.”

In Las Vegas, the Caesars Palace property gives Park Place control of three corners of one of the busiest gaming intersections in the world: Flamingo Road and the Las Vegas Boulevard “Strip.” Park Place already has the Flamingo Hilton, Bally’s, and the new Paris casino lined up there. (On the fourth corner is the Bellagio, opened this year by Mirage Resorts Inc., the only other serious bidder for the Caesars properties.) In Atlantic City, too, Park Place and Caesars hotel-casinos are adjacent.

“We just stayed focused. We knew there would be good investments to be made in the gaming industry,” says LaPorta. And Caesars “just came along very quickly.”

Certainly, the price seemed right. LaPorta says only that Park Place’s price for Caesars was “less than what [Starwood] paid” as part of the total ITT transaction, declining to elaborate because it might be construed as “a little inflammatory to the seller.” (A Starwood spokesman won’t comment, and says his company was pleased with the final price it received from Park Place.)

Discussions about Caesars started as “a conversation between Arthur Goldberg and Starwood,” says the Park Place CFO, who adds that “Arthur initiated it.” Goldberg led Park Place’s talks with Starwood chairman Barry Sternlicht and then-CEO Richard Nanula, who left Starwood in April. “Specifically,” says LaPorta, “my team worked on the valuation of assets, forecasts of the property cash flows, the impact of the acquisition on Park Place, and the financeability of the acquisition.”

How valuable was it to Park Place that its executives had already prepared Hilton’s competing ITT bid, including valuations for Caesars? “It was helpful that we had looked at the assets previously,” says LaPorta, “but it wasn’t really necessary.” In both Las Vegas and Atlantic City, he notes, Park Place managers already had a good idea of Caesars’s worth.

Perhaps more important was that, from the beginning, according to LaPorta, Park Place “was the best buyer of the assets, in our minds.” The new company possessed “the strongest balance sheet with the lowest leverage in the industry.” And banks, which are financing half the purchase (the other half is from public bond debt), also liked Park Place’s regional diversification. “That gives creditors a lot of comfort that we’re not susceptible to one marketplace” going bad. “So we could borrow more money,” he says.

Park Place’s diversification was also a plus for the seller. “Starwood’s objective was to exit the gaming business in its entirety,” LaPorta notes, and his company came close to allowing that. “We could acquire the whole [Caesars] division and assimilate it into our infrastructure,” because both Caesars and Park Place have organizations containing western, eastern, and midwestern regions, along with international operations.

Three rules guide Park Place in its acquisitions. “The first [rule] is that it has to be strategic,” LaPorta says, providing “assets in markets we’re not in, or serving a different customer base. The second is that it has to be accretive. To me, as CFO, that means it has to be accretive to our free cash flow as well as earnings. Third, we like it to have built-in growth.” The Caesars transaction, which gives Park Place a luxury hotel­casino presence, “fits in perfectly on all those fronts,” he adds. And it has given a healthy boost to the Park Place stock price.

Settling for Subscribers

Comcast found its consolation prize as soon as it agreed to pull back its $58 billion all- stock offer for MediaOne Group Inc.

On Saturday, May 1, MediaOne accepted a competing cash-and-stock offer from AT&T Corp. that topped Comcast’s by $6 billion. Investors waited to see whether Comcast would team with a powerhouse like Microsoft Corp. or America Online Inc. and take AT&T to the mat in a bidding war.

It didn’t. Instead, Comcast spent two days with AT&T executives hammering out a plan to give Comcast what it wanted most: vastly more subscribers for its cable systems. And it won its spoils without having to challenge Ma Bell’s deep pockets in an auction, and without having to manage a complex entity like MediaOne, which had numerous operations that didn’t fit well with Comcast.

“We’d have spent the next couple of years dealing with that,” says Lawrence Smith, the Comcast executive vice president who has responsibility for financial administration and corporate accounting. “It would have diverted a lot of management attention.”

“That Sunday, we got a call that there was a transaction [AT&T] wanted us to take a look at,” says James Alchin, the Comcast senior vice president and treasurer who worked with Smith in the dealings. “It was refined, negotiated, and debated over a 48-hour period.” Before coming to terms on the subscriber-trade, though, Comcast explored the formation of a venture with other partners to make a competing bid for MediaOne, among other options.

AT&T, which itself faced risks associated with prolonged bidding, promised an exchange between AT&T-MediaOne and Comcast that could result in a net gain for Comcast of 2 million subscribers–in all the right places. “It allowed us to make our footprints bigger in the areas where we continue to do business,” says Smith, who allows that at one point Comcast had attempted to get 3 million subscribers in the deal.

The deal that was signed with AT&T will cost Comcast about $9 billion, or a relatively inexpensive $4,500 per subscriber. Offsetting that is “the $1.5 billion breakup fee that we were entitled to anyway,” says Alchin.

AT&T hasn’t commented on the deal with Comcast, but a person familiar with AT&T’s strategy says the proposal was designed by CFO Dan Somers, along with Leo Henry, president of the AT&T Broadband unit, who delivered the weekend offering to their would-be rivals at Comcast. The negotiated defusing of a potential bidding war, this source adds, “exactly reflects the style of Mike Armstrong,” AT&T’s chairman and CEO.

The final arrangement certainly impressed Comcast investors. They had knocked its shares down from $36 to $29 a share, after accounting for a stock split, over fears “that we might be too anxious to get these assets at any price,” Smith says. They sent the shares back up to $40 briefly, when the AT&T-Comcast deal was struck.

What’s the main lesson to be learned from Comcast’s experience after its MediaOne bid was challenged? Study all the options. “You’ve got to be flexible,” says Smith, “and play the cards you’re dealt.”

“Our Patience Paid Off”

Glenn Eisenberg, United Dominion’s executive vice president and CFO, also sees wisdom in staying alert after a failed acquisition bid. “The deal you lose could come back to you,” he asserts.

Not that you necessarily want it. When a winning bidder does sell parts of the company it acquired, it usually charges a multiple higher than buyers were willing to pay for the whole target. “Sometimes we’re competitive for a company with a variety of assets, because others aren’t interested in the whole thing,” Eisenberg notes. “The proper value for it might be, say, seven times EBITDA [earnings before interest, taxes, depreciation, and amortization],” but in selling pieces, the buyer “can charge nine times EBITDA” to compensate for the tax benefits he would otherwise have gained by selling the whole company. Thus, he sees the discount Park Place paid for Caesars as a key to that deal.

His own favorite success story involves a consolation prize that exceeded even his original goal. In 1990, United Dominion made an all-cash offer for Ceco Industries, a private maker of hollow metal doors and preengineered metal buildings. “The principals of Ceco rejected our offer in favor of a combination of cash and stock made by H.H. Robertson Co.,” Eisenberg recalls. But soon after, circumstances put the combined Robertson-Ceco “in a precarious financial position.” In 1992, United Dominion bought from Boston-based Robertson-Ceco not only the Ceco assets it had wanted, but Robertson’s commercial wall and roofing operations as well.

“Our patience paid off,” says Eisenberg. “We were able to acquire the assets of these two businesses for less than the value in our original offer [for] the door business alone.”

Where might future M&A consolation prizes be found? In such industries as telecommunications and aerospace and defense, both of which feature a fast- shrinking number of players, suggests Wharton’s Mark Sirower. There, it could well be that unwanted assets changing hands in an acquisition will find new homes among the winning bidder’s rivals.

“Watch what happens with these big oil deals,” Sirower says. “As pieces are disposed of, it’s going to be interesting to follow where they go.”