Harrah's gambles on tax law


Back in April 2007, Harrah's Entertainment Inc. became a private company through a $17.1 billion buyout. To get the deal done, the private equity sponsors -- TPG and Apollo – piled on huge amounts of debt.

At the time, the deal looked smart. After all, the gambling industry was thriving. Moreover, debt markets were highly liquid.

Of course, within a few months, the U.S. economy would sink into a credit crunch. The upshot: the Harrah's deal has turned into mess.

However, private equity operators can be savvy. In fact, there may be some good news for Harrah's. How? Well, there could be a boost from lush tax breaks from President Barack Obama's new fiscal plan, according to the Wall Street Journal.

Basically, Harrah's is planning to do a debt-exchange offer. Through this transaction, the company will be able to significantly reduce its debt, which is currently at $23 billion. Normally, this would trigger some pesky tax obligations – but not any more.

Now, a debt-exchange is not completely hopeful. To get creditors to take discounted notes, a company usually needs to provide higher interest rates or other benefits. But, hey, it's better than going bust, right?

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Streetsmart Guide to Short Selling: Techniques the Pros Use to Profit in Any Market. He is also the founder of BizEquity, a free online business valuation tool for small businesses.

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Last updated: February 12, 2012: 07:00 PM

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