Harrah's Entertainment Inc. (HET) Thursday said it would buy Caesars Entertainment Inc. (CZR) for about $5 billion in a deal that would create the world's largest casino operator and make Harrah's a major player in Las Vegas.

Harrah's also said it aimed to convince regulators that it should keep all five casinos owned by the two companies in Atlantic City. There are only 12 in New Jersey, but Harrah's will argue that the spread of gambling in the Northeast has changed the competitive landscape.

Harrah's has agreed to the United States.

The deal would turn Harrah's into a major player in Las Vegas, the main gambling market in the United States, which has been growing fast for more than a year, and give it nearly half the slot machines in Atlantic City.

Shares of Harrah's fell 5.6 percent in midday trade to $48.12, knocking the value of the deal down from $5.2 billion, and Caesars shares fell 5 percent to $15.20. The value of the deal to Caesars had been $16.96 per share at the Wednesday close, Harrah's said.

Harrah's Chief Executive Gary Loveman (search) told investors the gambling industry was becoming a two-horse race between his firm and MGM Mirage (MGG) , which made its own $4.8 billion deal last month to buy Mandalay Resort Group (MBG), uniting the third and fourth-largest operators.

Federal and state anti-trust regulators are expected to give both deals tough scrutiny, but neither pair of companies plans to offer concessions.

Loveman told a conference call that the proliferation of gambling across the United States by governments seeking revenue and Indian tribes building gambling halls created a national grid of competition.

That would make it "not unreasonable" that Harrah's could keep the five of 12 casinos in Atlantic City held by his company and Caesars, Loveman said, adding that he had not yet spoken with regulators. Together the five casinos control 46 percent of the slot machine market in Atlantic City, which lags only Las Vegas as a gambling destination in the United States.

The Caesars deal is seen primarily improving Harrah's hand in the Las Vegas market, where it only had two casinos. Las Vegas is popular with tourists and Loveman said he had high hopes Atlantic City would also become a resort destination.

Loveman said he would take a hard look at changing the focus on high rollers at Caesars Palace (search), a boon for MGM which caters to big-bet gamblers, as Harrah's is focused on a core market of frequent gamblers who place smaller bets.

That strategy has produced a steady stream for Harrah's which has made a name for itself by growing a national network of casinos.

Recently, however, it has looked toward Las Vegas and Atlantic City as the two most lucrative gambling markets with steady tax and regulatory policies.

Harrah's said it would focus the company on three brands, Harrah's, Caesars and Horseshoe, which make up less than half of its portfolio, the legacy of a series of mergers and acquisitions.

The company nevertheless probably will sell casinos in Indiana and Tunica, Miss., and it may cut its portfolio in the Lake Tahoe area around the northern California and Nevada border as well.

The companies have agreed on a break-up fee of $180 million.

Loveman said the deal valued Caesars at eight times forward earnings before interest, tax, depreciation and amortization. The combined giant will spend about $1 billion on maintenance and improvement next year, and Harrah's expects to squeeze $80 million of cost savings in the first year after the deal closes, which is expected in mid-2005.

Analysts on the call asked why Harrah's would not save more, and executives said they were being conservative.

Ratings agencies Moody's and Standard & Poor's also affirmed Harrah's investment-grade credit rating, although S&P cut its outlook to negative. Both said the outlook for lower-rated Caesars debt was positive.

Including the assumption of Caesars debt, the deal would be worth about $9.4 billion as of the close on Wednesday. That figure also includes a payment of about $250 million in cash to retire stock options held by Caesars executives, a person familiar with the situation said.