The Caesars gaming empire has had a long and winding history. It started in 1966, with Jay Sarno’s idea for Caesars Palace, where he would deliver a Roman experience where every man—and woman—would be treated like a Caesar (remember, there’s no apostrophe in Caesars, because it’s an experience meant for everyone, not just an individual).
But the actual empire itself was always on shaky ground. Sarno couldn’t cut the finances (partly because he himself was a compulsive gambler), so the Teamsters units that funded the construction of Caesars Palace took over. Then, when licensing became an issue because of reputed organized crime ties, Clifford and Stuart Perlman, owners of the Lum’s restaurant franchise chain, were brought in.
But ownership of the company was always convoluted. Through the years, it was owned by Park Place Entertainment and Starwood Resorts. Finally, in 2005, it was purchased by Harrah’s Entertainment, which changed its corporate name to Caesars Entertainment, recognizing that the Caesars brand is one of the strongest in gaming.
Of course, the purchase by Harrah’s stretched the company’s roots back to Bill Harrah in 1930s Reno, when he opened a bingo hall on Virginia Avenue. Ironically, the new owners of Caesars Entertainment got their start just down the street from Harrah’s, at a property recently sold to become a condominium project.
The story of Eldorado Resorts is just as improbable. The world’s largest gaming company started in a little bingo parlor.
But it’s not just a coincidence of geography. The way Eldorado runs its resorts is very Harrah-like.
“There was only one Bill Harrah,” says Eldorado Chairman Gary Carano. “I remember growing up in Reno, working in the casino business, growing up at the Eldorado. Bill Harrah was famous for the way his properties were spotless. They were secure, you felt safe. ‘Cleanliness and security are next to godliness,’ was Dad’s saying. Having grown up in Reno with Harrah’s when it was in its glory—that was the gold standard.”
Gary Carano comes from a gaming pedigree that is undisputed. His father, Don, became one of the top gaming attorneys in Nevada after he returned from World War II and co-founded the law firm McDonald Carano & Wilson. As a gaming attorney, Don Carano gathered enough experience that he opened his own casino hotel in 1973, the Eldorado Resort in Reno. He married Rhonda, a woman he hired at the Eldorado, and produced five children, all of whom still have roles in the business.
In the 1980s, Don and Rhonda Carano founded the Ferrari-Carano Vineyards in Sonoma County, California, and his interest in gaming began to wane. But that didn’t happen to son Gary. He played a big role in ramping things up on the gaming side, first with a partnership with Circus Circus (later MGM) in the construction of Reno’s Silver Legacy resort.
It wasn’t until the 2000s that the Caranos began to look outside Reno for regional opportunities. By that time, Tom Reeg had become part of the company—and part of the family. In the 1990s, Reeg was a high-yield credit analyst at Bank of America when he met the Caranos and later started his own investment firm, raising money for Eldorado projects. Reeg participated in the purchase of what became the Eldorado Shreveport, then engineered the company going public by purchasing the publicly listed MTR Gaming in 2014.
Carano says the company kicked a lot of tires before that time, because of the talent within the company.
“We had a great bench of management,” he says. “We got to the point where we were tripping over each other, and not only family members, but our great group of managers, and we wanted to spread our wings.”
The purchase of MTR not only enabled Eldorado to go public, but it also exposed the company to several regional markets. It was able to improve the performance of each property using the management strategies it had perfected at the Reno properties.
“Early on,” says Reeg, “our suspicion was there were a lot of unnecessary marketing subsidies in the regional space in particular. And through those acquisitions, we had had the opportunity to test that theory and find that, indeed, there were subsidies that didn’t impact visitation, that we could adjust, and that that cash flow would fall to the bottom line.”
A casual business dinner with Isle of Capri executives, including Rob Goldstein, whose father, Bernie, had founded that company, ended with Goldstein saying, “I feel very comfortable with you being the new owners of this company.”
Carano said the declaration surprised him. “I asked Tom, ‘Did you understand what I just understood? Like, we just made a deal.’ So, we felt there was a lot of low-hanging fruit there, and it proved to be a very good buy. Isle of Capri had put a lot of capital into their properties, thank goodness, over the last few years, before we purchased them. Because before that, they were lacking in capital, and it showed.”
With Isle of Capri, Eldorado once again proved it had a management model and strategy that worked. And investors took note. Since the MTR deal, when Eldorado first hit the market in 2014, the stock price has increased tenfold. That kind of success got the attention of important people, and around the next bend in Eldorado’s winding road waited billionaire Carl Icahn, who sometimes uses the gaming industry as a toy, building and growing companies until he can multiply his investment many times over, and then moving on.
In this case, says Reeg, the advance came from Gaming and Leisure Properties Inc. (GLPI), a spinoff of Penn National Gaming that became the first gaming real estate investment trust (REIT). He was talking to Icahn about buying the real estate assets of Tropicana Entertainment.
“I got a call from Steve Snyder (GLPI CFO at the time) asking if we would be interested in operating and buying the operating interests in these assets. I said, sure, we’d take a look,” says Reeg. “We had done zero real estate financing at that point. Everything we had was owned on the balance sheet. With the Tropicana transaction, we were buying a little less than half the business. GLPI was buying the other half, in terms of what the lease payment would be, and we would get all the upside in the transaction. So, we were buying at a lower multiple. If we could drive the same operating upside we had driven in past acquisitions, you kind of turbo-charged your returns.”
It didn’t take long before another opportunity arose—a huge one. Reeg says he began getting calls from Caesars shareholders, asking if he could look into the company, which had failed to reach its potential for almost a decade. So he reached out to Don Kornstein, a friend on the Caesars board, to assess the interest.
“I told him, ‘If I’m getting calls from your shareholders about their unhappiness, I can’t imagine the calls that you’re getting. If you’re interested in examining a transaction, we fix broken operating entities, and we would be willing to take a look.’”
Kornstein took the idea to the Caesars board, where it was roundly rejected. Carano believes the meeting with then-CEO Mark Frissora was destined to fail.
“So we all went on with our lives,” says Reeg.
Late in 2018, Reeg had dinner with Carl Icahn after closing the Tropicana deal. He mentioned the Caesars situation, “if you ever want to get back into gaming.”
“It was a passing topic of discussion, and a very long dinner,” says Reeg, who thought nothing of it.
“Toward the end of ’18, there were press reports about him accumulating a stake in Caesars,” he explains. “As is typical, Carl doesn’t tell you about his investment positions. A couple of months later, I got a call from him, and he said, ‘I want to move this transaction forward, and if you’re still interested, I’d like you as a manager.’ That was in late January 2019. Those discussions started by the beginning of March, and by June, we had a transaction.”
For Carano, the deal made sense.
“I’ve always been a great fan of Phil Satre and what he and his team built at Harrah’s and then Caesars. But in 2018, long after Phil was gone, two previous CEOs had a hard time getting through the crash. They came out of it with a lot of debt. It wasn’t the same company that Phil built, and the company that we purchased is going to look a lot different, a lot more closely modeled on what Phil has done over the years.”
When word got out that Eldorado was the front-runner to acquire Caesars, it made no sense to some observers. The company wasn’t large enough to swallow Caesars. Yes, it had been successful in its previous acquisitions, but those were much smaller, more manageable deals. Caesars is a mighty company, with lots of traditional structures. For Eldorado to perform its magic, there had to be massive changes.
Reeg set to work outlining all the cost savings and synergies that would be achieved by Eldorado to make it a worthwhile deal for Caesars shareholders. He targeted $400 million to $500 million in savings, a number that was clearly attainable. On June 24, 2019, the $17.3 billion deal closed, and due diligence began from a regulatory perspective. Several properties were sold by both Eldorado and Caesars to get the regulators’ nods, and even more as they approached the finish line. But the deal finally closed in July 2020, right in the midst of the Covid-19 pandemic.
Carano said that caused a little consternation early on, during the lockdowns.
“It was a critical time in March. When we’re getting close to all of our jurisdictional approvals, and closing in our financing, here comes Covid-19. There there some moments that Tom and I, Bret Yunker, our CFO, my son, Anthony, and others all huddled up. Our first concern was, were we going to be able to do this with our bankers? And that was a firm ‘yes.’ They stood behind us 100 percent. Then we also asked ourselves, ‘Is this the right thing to do, in these unchartered times that we’re living in, as we’re getting better as a world, and as an America, health-wise?’ But it was.”
For Reeg, it was simple mathematics.
“We were so overwhelmed with all the operating decisions you had to make at that time, ultimately shutting our properties, furloughing employees, developing health and safety protocols with experts in the field,” he says. “You’re kind of drinking from a firehose as that’s going on. Once everything was closed, and you start to calm down a bit, you do the underwriting again.
“Our choices at that point were to pursue the transaction as we had laid it out, or somehow break the transaction and risk that we’d be paying over $1 billion in break-up fees between Caesars and VICI. So, it becomes a math decision. What’s the better outcome? Are we better off on the path that we were headed down, or are we better off on a stand-alone basis, with potentially $1 billion out the door, in some form or fashion, and/or some protracted litigation related to that breakup? It was a very easy and relatively quick decision.”
Reeg’s estimates of synergies and cost savings were actually helped by Covid-19.
“At the time of our financing, we had $400 million of cost synergy in our original target, which was kind of our typical playbook, of blocking and tackling at the corporate and property level. But now, we see another $400 million of opportunity due to a structural shift in the way business is done in the space.”
He attributes some of those cost savings to the reduced need for employees when operating at 50 percent capacity, the restructuring of buffets, which traditionally lose $4 million to $5 million a year (multiplied by 40 or more properties), and other issues related to health and safety.
As a corporation, Caesars had become known for a bloated C-suite—lots of development, government affairs, marketing and public relations execs responsible for various aspects of the business. With Eldorado in charge, that’s over.
“Our culture is to empower the property’s general managers and their management teams to make their decisions themselves, on the ground, instead of having the decision made in Las Vegas, without even consulting the property,” says Carano. “We’ll have a much, much smaller corporate team in Nevada, empower the properties, and make sure they have the right manpower at the properties to make those decisions.”
Carano says that doesn’t mean there won’t be oversight—company President Anthony Carano is in charge of that—but it gives them a responsibility that was not part of recent Caesars regimes.
“We’d rather have you make a decision and it be wrong than not make a decision at all, and just delay it,” says Carano. “That strategy was welcomed with open arms by our property leaders.”
Like all other acquisitions, the corporate structure is going to be decentralized, Reeg adds.
“That’s been our DNA all along,” he insists. “Our view is, we make our money at the local level, from the customers in these properties. The more people you put between the front-line people that deal with them every day and the person making the actual decisions, the poorer the outcome.
“Caesars was the gold standard for a very long time in this business, management chief among them. And there’s talent at the operating level in Caesars that’s been in this organization for 10, 15, 20 years, that has been handcuffed by the way decisions were made. We’re really just trying to take the handcuffs off and let talented operators do what they do best.”
The sales of individual properties started long before the deal was finalized to avoid SEC violations and regulatory oversight. While not a requirement of the approval of Nevada regulators, Reeg has committed to selling one of the Caesars properties on the Las Vegas Strip.
“We were hopeful that would be in the first 12 months post-closing,” he says. “Given the environment with the virus, that might be the first 12 to 18 months. But really, that’s a decision based on the fact we don’t need to have 24,000 rooms in a single market to fill every night.
“If I can tighten that yield management by adding Eldorado customers to the database, then tighten it further by reducing the amount of rooms I have to fill, and have a billion and a half or $2 billion available to me to pay down debt, I think that’s the right answer for our stakeholders.”
The sales of other properties didn’t have the financial impact of a Strip sale. Bally’s Atlantic City to Twin River garnered just $25 million, and the sale of Louisiana Downs near Shreveport, only $22 million. Three racetrack sales in Indiana won’t bring much, either.
“We’re not married to our size or any particular asset,” says Reeg. “We have significant plans to drive value through the existing portfolio. We have a handful of divestitures that we’ve scheduled.”
Caesars Rewards (formerly Total Rewards) is the epitome of loyalty programs in the gaming industry. Introduced under Phil Satre and refined under Gary Loveman, Caesars Rewards is often the tool that drives visits from customers who want to be eligible for an annual vacation to Las Vegas or a stop at any of the Caesars casinos on other trips. Reeg believes Caesars Rewards will only get better under the new regime.
“You’ve seen the power of Caesars Rewards in the relative operating performance on the Strip over the last three years or so,” Reeg explains. “Caesars did the best in terms of driving hotel profitability and casino profitability when times were good, and they’re doing it again now when we’re in harder times in Vegas, where you’re seeing us operate at something like 1.5 to 2 times the occupancy of our peers. It’s because of that Caesars Rewards database. But I also look to what can we do with that database as we move forward. A significant percentage of the adults in the United States are a part of this system. And these people are spenders. They have disposable income that they choose to spend at Caesars because of the rewards program.”
Carano says his company again stepped into a situation where money had already been invested with Caesars Rewards.
“Prior to our deal, Caesars had spent a lot of money of the last four or five years on technology,” he says. “That’s going to make it easier to integrate the two loyalty programs together. I expect it will be done in less than one year.”
Reeg says Caesars Rewards drives business to other casinos in the enterprise, so it’s not just a visit to Las Vegas.
“The key piece of Caesars Rewards is the cross-market play that’s generated,” he says. “That was a striking factor as we did our due diligence and went to the properties. Each of them would tell us, ‘Here’s how much cross-market play is generated in the system.’ Having owned, operated and purchased a number of properties from other operators, there’s nobody in the business that develops and generates the cross-market play that Caesars does. If I can utilize the brand, that program, in a market where I’m not a competitor—there are a lot of tribal markets, there are markets in the Northeast, where we’re not a player—I think that could be an opportunity going forward.”
Another brand Caesars owns is the World Series of Poker, an event held annually at the Rio in Las Vegas. It’s no longer owned by Caesars, but is still managed by the company under a two-year contract. Carano waxes nostalgic about the WSOP, and its connections to Jack Binion and all the great poker players of the past. There’s been some speculation that it would be transferred to the new Caesars Forum convention center, a new 500,000-square-foot facility behind the Linq on the Strip. Carano is undecided.
“Does it feel right at the Forum?” he asks. “Or does it go into one of the properties on the Strip? Hopefully it will be able to stay right at the Rio, where they’ve been doing a great job all these years.”
The legalization of sports betting two years ago was a major moment for a company like Caesars. The sportsbook at Caesars Palace is one of the iconic shrines to sports betting in Las Vegas. As Eldorado, a deal was made with William Hill US to run all Eldorado sportsbooks in legal sports betting jurisdictions. But with the Caesars purchase, things have changed, according to Reeg.
“As Caesars, we should look for a partner that has aspirations to build a national brand, and that will let us participate in that upside,” he says. “We had an existing partnership with William Hill and (CEO) Joe Asher that had gone quite well for us. We talked to a number of potential partners, but it was very clear to us, both economically and operationally, that William Hill was our best option, and we signed that deal prior to the Caesars deal. Caesars has a very different portfolio in this area, and brands that resonate with the customer. So, the way the deal is structured is that William Hill steps into the Caesars sportsbooks. We keep all our online casino and online poker business, and that’s how we would move forward. I don’t know that that’s optimal for either side.
“If you ask them, I’m sure they’d tell you we’d like a single-wallet solution that solves for all of those areas, and they don’t have a path to that in the current partnership. We would tell you the Caesars brands and the sports partnerships that they bring are much more fulsome and will drive much more value than Eldorado brought to the table on its own. So we’re looking for a path that’s in the best interest of both the partners and the stakeholders on all sides.”
During the Covid lockdown, iGaming revenues in New Jersey and other legal states (Pennsylvania, Delaware and Nevada) soared. States that lack legal iGaming took notice and most observers, including Reeg, believe it will open a path to iGaming in many more states.
“There are some compelling stories out there,” says Reeg. “It’s an extremely exciting and large opportunity for the space. It’s the biggest—I said this on our earnings call—this is the biggest growth opportunity for gaming since riverboats were legalized in the ’90s.”
Carano acknowledges that Caesars hasn’t been one of the leaders in iGaming, but says this will change. While he wouldn’t reveal the plans his executives are working on, he said it will be significant.
“We’ve got some exciting potential things for online gaming coming in the future, taking advantage of all our properties nationwide. We just wanted to do it right. We haven’t been a big player in it, but I think you’ll be surprised in the next year, that we’ll be able to make an announcement that will definitely shock the gaming industry.”