Harrah's gambles on UK with London Clubs bid

For shareholders in London Clubs International, yesterday's £279.3m bid from the US gaming giant Harrah's Entertainment was the City equivalent of a royal flush. Five long years after the Budd report advocated tearing up Britain's antiquated gaming laws, the Yanks have finally arrived.

The recommended offer from the doyen of the US gaming world trumped London Clubs' previous plans to merge with Stanley Leisure. The duo were in talks about a nil-premium tie-up, but Harrah's quick work - it wrapped up its bid in three weeks - ruined Stanley's plans.

Harrah's, a $11bn (£6bn) gaming Goliath, has bid 125p per share in cash, an offer that values its target at almost one-third more than shares in London Clubs' have averaged during the past month.

Yet despite its swift work, Harrah's could still be denied entry to the UK casino scene. Its ultimate bouncer is Genting, the Malaysian casino group that has amassed big minority stakes in London Clubs and Stanley Leisure. And Genting was playing its cards very close to its chest yesterday, saying only that it was reviewing its strategic options. M&G and Fidelity also hold big stakes in London Clubs, and so far neither has rushed to back Harrah's.

Indeed, shares in London Clubs shot 34 per cent higher to close above the offer price at 132.5p, suggesting investors believe that another bidder may emerge. Stanley's shares also surged, rising 38p to 656.5p in anticipation that one of the other global gaming giants could make a move now that the company is back on the market.

"London Clubs' board have done a good job and we note that it has recommended Harrah's offer, but this could well just be the starting point," one top shareholder said.

After the initial flurry of excitement prompted by Alan Budd's astonishingly libertarian review of the industry in 2001, US gaming groups arrived en masse. But the raft of joint ventures signed between the likes of Harrah's and Gala, one of the four big UK casino operators, were quickly torn up when the Government went back on its initial plans for eight "super-casinos". Instead, it will grant just one licence, in one of the seven cities shortlisted earlier this year.

Bill Timmins, London Clubs' chief executive, believes that with the financial muscle of Harrah's behind it, the company will stand a much better chance when it comes to putting in its bid for the super-casino licence this year. As well as the big one, the Gambling Commission will dish out licences for eight small and eight large sites.

"This deal was driven by Harrah's desire for a UK base to expand in Europe and by London Clubs' desire for more capital and resources so that it could fully benefit from deregulation," said Mr Timmins, who will be staying on, provided the deal goes ahead.

If that happens, Harrah's is getting a company that has been transformed in the past five years. Today, London Clubs owns six UK casinos, as well as two in Cairo and one in South Africa, having sold its Las Vegas site, Aladdin, that nearly forced it into the bankruptcy courts.

But it is the five sites that London Clubs' has in the pipeline that really whetted Harrah's appetite. An all-singing, all-dancing, 60,000 sq ft casino is due to open in Manchester next month while a similarly sized site is being prepared for a March 2007 opening at Leicester Square in London.

Andrew Tottenham, Harrah's top man in Europe, said London Clubs had been its pick of the UK crop because, like the US group, "it is in the entertainment business".

Rather than just offer punters the chance to gamble on a few slot machines, London Clubs' casinos are massive leisure hot spots that combine shows with cinemas and restaurants. They are not quite on a par with the likes of Harrah's Las Vegas Coliseum, a venue it acquired when it bought Caesar's Entertainment for $5.3bn two years ago. That venue regularly hosts the likes of Sir Elton John and Celine Dion, but they at least come close.

Harrah's founder, William Harrah, who started the group in 1937, is heralded as one of the architects of modern Las Vegas. He advocated strengthening the gaming laws to drive out corruption and was the first to invite African-American entertainers to perform at his casinos. The group overtook MGM Mirage to become the world's biggest gaming force with its acquisition of Caesar's.

Leisure analysts predicted yesterday that the move by Harrah's would force other international operators to show their hand.

"This deal highlights the interest of international operators in the UK," Wayne Brown, at Altium Securities, said. "The world's five biggest gaming groups - Genting, MGM Mirage, Kerzner, Harrah's and Starwood - all operate in fairly mature markets. UK casinos can expect an impressive increase in membership and demand [once they are allowed to advertise from next year]."

Just 2 per cent of the UK adult population has visited a casino, compared with 30 per cent in the US and 15 per cent in France, suggesting the scale of potential growth. But Mr Brown warned that deregulation was not without its challenges. "Even though lifting the advertising restrictions will deliver significant positive benefits, it won't be a smooth road to riches. There will be hiccups along the way." Being part of a vastly larger group will give London Clubs a better chance of eventually cleaning up, he added.

Mr Timmins, a veteran of the industry, agreed that more consolidation was inevitable. "This has certainly stirred up some dust in the sector," he said.

For now, the likes of MGM are content to have focused their efforts on trying to secure one of the super-casino licences rather than swallow up a UK player. MGM has proposals on the table in three of the shortlisted cities - Sheffield, Glasgow and Newcastle. But should the prize licence get dished out to one of the other four (Blackpool, London, Cardiff or Manchester), MGM's game plan could change overnight. "Due to the legislation surrounding the industry, the only way for a new competitor to enter the UK casino business is to win one of the 17 new casino licences or buy an existing company," Nigel Parsons, at Evolution Securities, said.