Vol. 7 No. 7, July 2008
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Gary Loveman
Chairman, President & CEO, Caesars Entertainment
Casino Connection: Now that you’re a private company, how does it change the way you approach your job?
Loveman: It’s changed my job a fair bit. I spent a lot of time engaged with public company constituents of one sort or another whether it’s the independent directors or equity investors, stock market analysts—there’s a whole process to managing communication in a public company environment that is not particularly valuable but is an obligation, and an important one. I no longer have to be attentive to that, so I have much more time to devote to the other things that I should be working on in the company, the folks that I work with, customers and businesses we’re looking after. I have an extremely capable, very enterprising group of partners in my two private equity friends that are really quite helpful to us.
Is there a cap on capital reinvestment in any Harrah’s properties? We understand that you’ve scaled back on some of the expansion plans and things of that nature.
We don’t put a cap on it, but we put a higher rate of expected return. When we were a public company and we were borrowing at 6 percent or 7 percent, if you were an operator at one of our facilities and you had a project that had a 9 percent or 10 percent expected return, that was in the shareholders’ interest to pursue, and we would.
Today, in a much tighter market with private owners that are expecting much higher rates of return, a 9 percent return on a buffet remodel or some such thing is just not going to be feasible. So it pushes us to be more innovative and smarter in how we use it. But any deserving project can get funded, it’s just a matter that “deserving” is a higher bar than it used to be.
Tell us about the big center Strip project with all that Harrah’s owns in Las Vegas. Is that on hold right now?
No, we’re actively proceeding, but people have to recognize that it’s a much more complicated undertaking. We’re trying to architect a plan amidst a bunch of businesses that operate and are very successful. That’s a very different thing than tearing everything down and building something afresh. We have a $1.2 billion Caesars Palace expansion that’s well underway, almost halfway along. We have an arena that will begin construction later this year. We have a variety of other projects that we’ve made some noise about publicly here and there that are centered around building out this plan, and you’ll hear more about this over time. The last thing we want to do is take seven businesses that are very successful and turn them into one big construction zone and discourage anyone from wanting to be around Flamingo and Las Vegas Boulevard. So we’ll do this sequentially, but we’re very much underway.
You’ve talked also about non-gaming amenities and the return on investment in those amenities. Is this something that you look at very closely before you commit to anything other than gaming?
It all has to do with how these economics work. You see the non-gaming amenities arrive in jurisdictions where the gaming tax rates are reasonable. Since you can help monetize the costs of these big developments in the casino at a reasonable rate of tax. But you could never build a beautiful amenity in Illinois, where the gaming tax rate takes all the benefit. These things are very much coupled. I think the challenge everybody has to be aware of is that the revenues and the margins associated with the non-gaming amenity itself tend to be anywhere from zero to a very small number and can’t support enormous investments unless they’re monetized in the casino or in some other innovative way. That’s the challenge.
Gaming has had a difficult run in some of the states where it’s been proposed—Massachusetts, Maryland and Kentucky, in particular—in the last year. Do you think this is just that cycle we always go through?
I think it’s something deeper than that. Since 1992, we’ve had three states make it into gaming. That’s an extraordinary result when you think about what we’re talking about here. You need a perfect alignment of legislative leadership, gubernatorial leadership and probably business leadership, local business leadership, to make this work. Those things are very tough to find. The progress has been very modest, even in a state like mine, Massachusetts, where everybody acknowledges, without debate, that nearly $1 billion of Massachusetts revenue goes to Connecticut Native American facilities. There isn’t any debate about whether the residents ought to gamble, that issue’s long gone, it’s just a policy-making issue and still in Massachusetts this issue has been active for as long as I can remember. We went down to pretty spectacular defeat this year. I’m not encouraged. I think the industry needs, and we individually, have to do a much better job of communicating the merits of what it is we’re proposing.
Where do you think Harrah’s is going to be in five years? Is this going to be a typical public equity buy where they hold it for five or six years and then spin it back public?
I suspect an exit through a public market offering is the most likely result. How many years it’s going to be is hard to tell. It has to do with that markets and equity markets and how well we perform and so on. I think that either there would have to be some large strategic investor—given the size of the company, it would have to be a very large investor, a sovereign country’s investment entity or something like that.
