Harrah ’ s Entertainment Inc. proposed acquisition of Caesars Inc. Natali Alonso Tim Earnshaw

1. Harrah’s Entertainment Inc. proposed acquisition of Caesars Inc. Natali Alonso Tim Earnshaw Chris Graham Jeremiah Pitts

2. Contents • Background • the companies • the deal structure and context • Valuations • comparative companies / transactions • DCF • Conclusions • why these valuation techniques are most appropriate • what do they suggest is fair value for CZR?

3. Background • Harrah’s Entertainment Inc (HET) • 28 casino resorts throughout the USA • 2003 revenues of $4.3bn • 28m members of its loyalty program • Believes industry is only able to support two major players and is determined to be one of them • Caesar’s (CZR) • Premium brand within the industry though not as profitable as Harrah’s • 2003 revenues of $4.5bn, 29 properties • Focus on card and dice games cf. Harrah’s slots emphasis

4. Deal structure and context • Deal value of $9.44bn, including HET assuming $4bn of CZR debt • Cash and stock deal, shareholders have choice of what remittance they receive • Up to $1.8bn cash, and 66m HET shares • Friendly – Board of CZR have approved it • Break-up fee of $180m • Conditional upon certain CZR execs remaining!

5. Deal structure and context cont’d. • HET largest gaming company, until MGM Mirage/Mandalay Bay deal announced in June • HET acquisition of CZR announced less than a month later, restores them to #1 position • If both deals are approved, the # major gaming co’s will have reduced from 6 to 2 since 1996 • Both at same stage of regulatory investigation with FTC Major industry consolidation phase under way

6. Comparative transactions valuation Average EBITDA Multiple of 9.6, weighted average of 10.53 Average Sales Multiple of 2.5, weighted average of 2.7

7. Comparative transactions valuation • On this basis, the agreed terms of look very favourable • Even more so when you consider the implied valuation with MGM Mirage/Mandalay multiples • EBITDA multiple of 13.2 implies valuation of $14.5bn • Sales multiple 3.36 implies valuation of $15.12bn • Who’s paying over the odds to keep apace?

8. Comparative companies valuation

9. ? < Future Options < Synergies < Improvements < “As Is” .5B .4B 9.5B Price The Value of the Target DCF Valuation Market Cap + Debt

10. DCF Valuation • Improvements • From improved asset management – application of Harrah’s management expertise. • Assumed NOI improvement of 0.5% - conservative • Synergies • Attributed only $40M of predicted $80M total synergies, and grown at 5% annually • Future Options • Too difficult to quantify • Excluded in order to be conservative with valuation • Conservative in our assumptions • 3% terminal growth rate • Used improvement valuation rather than synergies in triangulation – synergies are speculative

11. Conclusions • Other valuation methods also used but results discounted because: • Inappropriate to the company/industry • Methods such as liquidation value and replacement value not very useful for a company like CZR where value is in its brand, reputation, customer base. • Stable industry with few major players, low uncertainty so methods such as real options not necessary or appropriate • Inappropriate to the deal • It is not motivated by asset-stripping possibilities but rather by strategic objectives • Comparables and DCF approaches are the most widely used valuation tools in this industry • it is variances from these valuations that are penalised in the market, if they exist • DCF accounts for important factors such as growth rates, cost of capital, current and planned structure

12. Conclusions Comparable transactions valuation $11.39B Comparable companies valuation $9.15B Discounted Cash Flow valuation $9.9B Yields average valuation of $10.15B • Suggests the deal is fair to both parties at the agreed terms of $9.44B • Suggests that HET are getting a better deal for CZR than are MGG for MBG – important for future perceived success of these transactions and for future industry developments