It’s been planned for several years, but when the name change was completed from Harrah’s Entertainment to Caesars Entertainment late last year, there was also a subtle change in the way the company went about its business. The brand instantly became more recognized internationally, and signaled that the struggles it has endured during the economic downturn may be easing.
Gary Loveman, the chairman and CEO of Caesars, has been at the helm of the company for more than 10 years. Former chairman Phil Satre brought Loveman in as COO in 1998 in a designed succession plan. Loveman engineered the massive effort necessary to take the company private in 2007 in a $20 billion sale to Apollo and Texas Pacific Group. Now recognized as one of the visionaries in the gaming industry, Loveman says the buyout was a mixed blessing. He no longer has to worry about quarterly earnings being the guideposts for the company, but he did have to create a return on investment for the private equity groups that were the company’s new owners.
“When you make the change from public ownership, you substitute public ownership represented by a fiduciary board of directors with concentrated private ownership represented by a few exceedingly capable people who have deep interest in the success of the business,” Loveman explains. “As CEO of this company, that means that I have partners who are very talented, deeply interested and also have access to a remarkable network, since they each manage in excess of $40 billion in invested capital. These relationships are enormously helpful to our business.
“I certainly don’t miss the days of answering questions about whether it snowed in Atlantic City this weekend or what the room rates will be in Las Vegas next month. Those are the interests of very short-term investors. Now, we have investors who measure their investment the day they buy it and the day they sell it, but don’t worry about what happens in the intervening period. I find this form of governance terrific.”
Doing the Debt Load
The massive level of debt may have been manageable during good times, but it became crushing as the economy soured. Loveman says the deal was struck at a time when revenues would have supported that debt level.
“You have to remember that when the deal was struck, the company was running at nearly $3 billion EBITDA,” he says. “We would have had about eight times that amount of indebtedness with the notion that as the business grew, the debt would come down. Unfortunately, the business did not grow—in fact, it shrank—so the leverage went up and we went to work cutting the debt.”
Responsible for slashing the debt was Jonathan Halkyard, Caesars’ talented chief financial officer.
“We had to focus on the generation of cash flow,” says Halkyard. “That’s actually easier than it sounds because, in the end, we’re just asking all our managers to treat this as if it were their own business. That’s just a basic way to approach any business, big or small. So changing the focus from earnings per share to cash was probably the biggest impact of going private.”
In the process, Caesars shaved more than $5 billion in debt off its balance sheet.
“We raised new debt, fully paid back the banks that had previously loaned us money, and extended the maturity dates,” says Halkyard.
When the economy changed, the original plan of operating a profitable company was challenged and Caesars had to respond.
“Like most companies, we had to go into a mode that was quite different,” says Halkyard. “First of all, we needed to address the cost structure. The revenues were lower and we had to reduce the costs. The second thing we had to do was to buy time. We couldn’t afford to have any near-term obligations that we wouldn’t be able to satisfy. So we did things like extend our debt maturity and raise additional cash… things that you would expect a company do that was still healthy but was stuck in a difficult time.”
Typically, the strategy for taking a public company private is rather clear. When a company is taken private, the successful investors come in, try to cut costs and increase profitability, and when that is accomplished, later issue an IPO and put the company back into the public sector. Loveman says that wasn’t the plan for Caesars.
“That may be a typical plan for an underperforming business, but that clearly wasn’t the case with Caesars,” he says. “Our idea was we would substitute a lot of debt for equity in a company that prior to the buyout was very lightly leveraged. At the time of the buyout, we were the only investment-grade gaming company operating in the country. We planned to take advantage of the company’s organic growth and the opportunities that were available at the time to yield a very nice return to the investors. It was not premised on big cost cuts.”
Halkyard points out that the company’s value is higher now than it was before.
“When we were public, the market value of our stock was about $13 billion,” he points out. “Now that we’re private, the market value of our bonds is more than $20 billion. So we actually have more value in traded securities than we did when we were a public company.”
Loveman says he’s not so much worried about the level of debt as he might be worried about the level of debt as compared to the profitability of the business.
“As the business recovers back to its 2007 levels,” he explains, “the leverage is measured as a ratio of debt to cash flow. That will naturally go down. And as we re-equitize the business—introduce more equity through an IPO or some other means—the balance sheet of the business will improve.”
An attempt to create a small amount of equity—$500 million—in an IPO for Caesars failed last year, but Loveman says it just wasn’t the right time—or price.
“We were seeking a handsome price for the equity,” says Loveman. “We didn’t want to part with equity unless the price we received was sufficient. We had a lot of interest, but not the price we were seeking, so we decided to postpone it. The amount we were seeking was not much compared to the total enterprise value of this business, so we’ll just wait until the time is right.”
Speculation that some of the major gaming companies that got into financial difficulties in the early days of the recession would resort to selling non-core or underperforming properties turned out to be invalid, expect perhaps for the sale of MGM Resorts’ Treasure Island in Las Vegas to entrepreneur Phil Ruffin. Loveman said property sales never made sense to him.
“The challenge we faced with the sale of any of our assets is that the purchaser usually doesn’t have a network of properties,” he says. “So if you take that property out of our network, remove the Total Rewards program and our management, the buyer has to convince themselves that they can run it as profitably as we did. And the history on that isn’t great.”
Halkyard believes that selling a property would be counterproductive unless the price was favorable to Caesars.
“People really didn’t understand the situation we were in,” he says. “Every one of our businesses is profitable. You can sell a business and raise cash, but then you also lose the earning ability of that business. When you do that kind of math, it rarely makes sense. For us, it never made sense, and it was never really an option for us.”
With the switch of the corporate identity from Harrah’s to Caesars, the question of how the numerous brands owned by Caesars will be utilized is an important consideration. Outside of the two corporate brands just mentioned, Caesars owns Horseshoe, Rio, Paris, Grand Casinos, Bally’s, Showboat, Flamingo and several others. Non-property brands include Total Rewards and the World Series of Poker. Loveman says the hotel brands will concentrate on one of the big three in the future—Caesars, Harrah’s and Horseshoe.
“The Horseshoes are arguably the highest-performing brands in gaming,” he says. “If you look at their performance in Chicago, Bossier, Tunica, near Omaha in Council Bluffs, Iowa… these are great businesses. And I give all credit to Jack Binion for creating this great brand, and our people have stewarded them well. That is a brand we continue to grow now with two upcoming casinos in Ohio. Caesars, we want to grow in other destinations; there are now just three. And Harrah’s is always strong. The other brands are a little more idiosyncratic. I don’t see us building any more Bally’s or Flamingos, or attempting to rebrand any of them.”
Halkyard says the brands are also important to him because of his role as CFO.
“I think about the brands more than you would expect for a CFO,” he explains. “One of my main jobs is allocating capital across the business, for capital reinvestment, growth and acquisition. So one of the first things we wanted to do was to expand the Horseshoe brand. We’ve rebranded a couple of properties and some of our new developments will be the Horseshoe brand. The second way is to allocate capital to our most powerful brands, the ones where we can really drive a return on our capital investment.”
The change of corporate identity was intended more for the international market.
“Much of the growth in this industry is in Asia,” says Loveman. “Caesars has been active in Asia for 43 years and is very well-known to Asian customers. Harrah’s isn’t. So when we present ourselves to political and business leaders in Tokyo or Taipei or wherever it is, Caesars is a prestigious, desirable name. We changed it for that purpose, not because we didn’t like the name of Harrah’s or want to de-emphasize it.”
Maybe the most important brand for Caesars is Total Rewards. Calling it a “players club” diminishes its importance to the company. Total Rewards was the cornerstone upon which the success of today’s company was built. And it largely has been built by Loveman. It was his focus when he first joined the company in 1998, and it has transformed what anyone thought a players club could be. Loveman says he thought it was the most important thing the company could do to enhance the players’ experience.
“At that time, we had a 14-casino network with only one place in Las Vegas,” he says. “It has proven to be much more powerful than we could have imagined. We have nursed it through several fairly substantial improvements and generational modifications over the years. And the next phase is to move it to mobile.”
The person charged with the conversion to mobile is Caesars Chief Technology Officer Katrina Lane.
In gaming, as in other industries, there still is some uncertainty about how to monetize and evaluate the impact of social networking on smart phones. Lane believes that a company must really know its customers before it can depend upon this method of communication.
“Many companies are being over-optimistic about what this can do for them,” she says. “If you look at the 20-32 demographic, those people will have hundreds of friends and brands they ‘like.’ So I wonder how deep those relationships are. There’s a bit of chasing the numbers going on out there. It’s a wonderful time to be working on these things, but I think some of it will play out a little differently than what the experts think.”
Non-gaming spend has recently been added as a factor in the Total Rewards equation. While Loveman expects that to grow, he thinks much of it will be available mainly in the destination resorts.
“In Las Vegas and Atlantic City, we have much more to offer in terms of non-gaming amenities than we do in Joliet, Illinois, for example,” he says.
“But if you step away from loyalty programs in gaming, and look at the goals, you want to have ubiquity at both ends. You want to be able to accumulate benefits in lots of places. You’ll see us push the program into providers other than our own. You’ll see partnerships with like-minded companies, which makes the underlying currency that much more valuable.
Social networking is a mainstay of the younger generation, for its use of time and exchange of information.
“The way in which that supports marketing is evolving,” says Loveman. “At the moment, it’s a marginal piece of what’s going on. It’s not nearly as important as knowing what a particular customer values and getting it to him in the right form at the right time.”
Lane says social networking offers a lot more information than the traditional methods, and increases customer expectations.
“This is going to force us all to raise our games,” she says. “The ability of customers to do direct research through their friends makes the level of transparency much higher than it has ever been.”
She says the expected response time for email is one day, but for a Twitter post, it’s only 20 minutes.
“How many of us are geared up to respond that quickly?” she asks.
Loveman says that responding to service deficiencies that emerge in social networking is its most important function.
“If someone is unhappy with the check-in process,” explains Loveman, “and he begins to Twitter all these mean-spirited tweets, we need to do something about it so the next Twitter might be favorable.”
Halkyard pauses when he considers what the Total Rewards program is worth to the company.
“I can tell you what we invest,” he says. “It’s in the tens of millions of dollars every year. We have 40 million customers in the Total Reward system, with 15 million active. Our premium with those customers is due in large part to the Total Rewards program. And we’re able to secure partnerships and opportunities through Total Rewards. So it’s an extremely valuable asset.”
Rather than contract while the market declined, Caesars actually expanded. The deal in which the company acquired Planet Hollywood on the Las Vegas Strip for $140 million surprised a lot of skeptics, and has proven to be very successful.
“We got a terrific asset and a great group of employees at a very modest price,” says Loveman. “It had the best year of its life in 2010, and when you compare its profitability to some of the monstrously expensive developments in Las Vegas, you’ll see how well this worked.”
Lane says the conversion to Total Rewards was accomplished faster than in any other property conversion.
“In just a little over a month,” she says, “we were able to have the program available for customers of Planet Hollywood and Total Rewards. So we made the benefits of Total Rewards available to our newest customers as fast as possible.”
In fact, it was the Total Rewards system that was one of the drivers of the decision for Rock Gaming to partner with Caesars on two new casinos in Cleveland and Columbus, Ohio. Matt Cullen, the president of Rock Gaming, says the ability to immediately attract Total Rewards customers to the new casinos was a crucial element in the decision.
“No other company has such a system,” he says. “For Caesars to be able to put that on the table during the negotiations was very powerful.”
Loveman says the company is looking forward to its joint venture in Ohio.
“This is a first-rate partnership,” he says. “They have great leadership and I think we might become partners with them in some other things. (Rock Gaming owner) Dan Gilbert has a big online business in Quicken Loans, so he knows that space very well.
“Cleveland will be a monster. Cincinnati will be a home run too, although there’s more competition there, unlike Cleveland, where there is not.”
In Las Vegas, Caesars is planning an “entertainment district” between the Imperial Palace and the Flamingo that will include restaurants, nightclubs and a Ferris wheel comparable to the huge London Eye that dominates the skyline near Westminster Abbey and Parliament in the British capital.
“We’re very excited about this,” he says. “We’re quite confident this will be a success, and if we can get an arena built behind Bally’s, that could revive the entire area.”
The proposed arena is a point of contention between Caesars and MGM Resorts, which objects to the use of public funding the build the arena. An existing 15,000-seat venue at MGM Grand might also be threatened by such a new arena.
Jan Jones, Caesars senior vice president of government relations, says the arena is important to the development of the Las Vegas Strip.
“Nothing will be built on the Strip for the next five years at least,” she says. “This arena will create jobs and bring a new vitality. Every day you’ll bring in new and exciting entertainment. I think the NBA has signaled we can get a team if we have a venue. And this arena would be owned by everybody. Caesars is just donating the land—$200 million worth. Any operator—including MGM—would have equal access.”
One of the things that Caesars has always stressed dating back to the days when Bill Harrah founded the company in the late 1930s is the community involvement that has been a hallmark of every Harrah’s/Caesars casino. The commitment continues to this day, and Jones believes it gives the company an edge when considering new locations.
“It’s a balance,” she says. “You want people to understand that we’re a smart company, we’re a good operator, we bring customer service standards, and you can drive a better business than anyone in the industry. It’s equally as important for those communities to know you’re going to be a good partner, that you’re going to live by your word, that you’re going to be philanthropical, that you’re going to have sustainable energy programs. It is a true partnership. You don’t want to come in and just be in a community; you want to be a part of it and grow with it. We’ve practiced that our entire history and will continue to do so.”
Jones, the former mayor of Las Vegas, understands that attention to problem gambling is an important element of the company’s integrity as well. In fact, Caesars was the first company in the industry to develop a corporate program to recognize that some players cannot gamble responsibly.
“With our ‘Code of Commitment’ and being very upfront with our self-exclusion programs, we have defined responsible gaming as very meaningful to the gaming industry,” she says. “We understand that only 2 percent of people have a problem with gambling, but we take the responsibility to do the right thing for our customers by taking this seriously. It’s also important to our employees, who want to feel they are doing the right thing.”
During the ESPN broadcasts of the World Series of Poker, Loveman appears at various points in an advertisement warning about the problems that segment of the population can encounter with gambling.
“It’s meaningful when the CEO of a company is saying ‘We want you to have fun, we want you to come to our casinos, but we want you to play responsibly.’ And I think governments, communities and regulators are looking at that. We want to set the standard and live by those standards,” says Jones.
Eyes on Asia
Macau woke up the world to the possibilities of successful gaming operations in Asia when the market was opened up in 1999. With Las Vegas Sands, Wynn Resorts and MGM Resorts obtaining concessions or sub-concessions, Caesars was the one major U.S. company that didn’t gain a foothold in Asia. Although the company owns the one golf course in Macau, it hasn’t been able to shake loose any additional licenses or concessions in discussions with the government or the operators. Still, Loveman hasn’t given up hope.
“There is always hope,” he says. “It’s not a simple process. We’re very interested in operating there, but we have to do it in an appropriate fashion. When it suits the interest of the governments of Macau and China, we hope to be there. We’re very respectful of the way they operate gaming there and we’re going to continue to pursue our interests and try to find an appropriate point of entry.”
Loveman says Caesars is eyeing other entry points in Asia—the Philippines, Taiwan, Korea, Japan, Vietnam and more.
“We’re looking at all those instances,” he says. “But you have to have the right coalescence of institutional features: a regulatory system you can live with, access by locals not just tourists, and other situations that are specific to each country. We are actively reviewing each country. Each of these cases takes years of ‘cooking’ before they become a place where something happens. The leadership of these countries is looking at Macau and Singapore and how well it has worked there. They’d like to emulate it, but how long it will take is anyone’s guess. It takes a perfect alignment of the stars to make these things work.”
Jones, who takes the lead in many of Caesars’ international expansion efforts, says the company brings a lot to the table.
“Strong regulatory framework, leadership in responsible gaming, and probably the most recognizable casino brand in the world are what Caesars is known for,” she says. “In Asia, as it gets more competitive, even in cross-market play, the Caesars brand has a record of loyalty and commitment that is unsurpassed in the casino industry.”
And because Caesars has not penetrated Asia yet with a property, Jones believes that the company has an advantage in some of the jurisdictions still considering gaming.
“Having the ability to bring in Caesars, which lacks a major resort destination in the region, will bring them something unique and important,” she says.
In Europe, Harrah’s had examined several opportunities in Eastern Europe and had a tentative agreement to become involved with the Don Quixote project in Spain, but national interests, regulatory issues and the bad economy have sidelined all those considerations.
“I have to say that most of these things have taken a back seat to other opportunities,” says Loveman. “In Spain, the economy is in terrible shape, so it doesn’t make sense to put significant capital in that country until the real estate sector improves. In Russia, the gaming zones just don’t make any sense to us. In Eastern Europe, there are some opportunities, but they’re not game-changers like Singapore or Macau. They’re more like Harrah’s St. Louis. Good businesses but not earth-shaking. There are opportunities but not immediate. We’ve always thought that a network like we have in the U.S. in Western Europe makes a lot of sense. And we’re going to start with Caesars Interactive, expanding outside the U.K. into other European countries.”
Online All The Time
After a bill in Congress that would have legalized online poker failed to pass late last year, the conventional wisdom is that things will only get more difficult for that kind of legalization in this year’s session. But Loveman says not so fast.
“Let’s take the argument to the logical extreme,” he points out. “Can you imagine that 20 years from now it will still be illegal for Americans to play poker online? I think most of us would agree that is highly unlikely. On the other hand, if you asked me to predict the month and year it will become legal, that’s hard.
“We believe that it makes complete sense that Americans should be able to play poker online, and we’re going to work very hard to convince the Congress that this is a good idea.”
Loveman says they won’t have to demonstrate how it would work because it’s already happening.
“Today, there are millions of people who play poker online with companies that are providing it illegally, are not taxed and don’t employ any Americans,” he says. “So how can a member of Congress argue that it’s better to have a company from Gibraltar provide internet poker rather than a company from Nevada with call centers, secure banks, payment mechanisms and employing Americans? It boggles the mind. I have a lot of confidence that we can get this accomplished.”
During the lame-duck session when the bill introduced by Senate Majority Leader Harry Reid (D-Nevada) was discussed, Loveman says many of these points were made with important legislators. And it also woke up the industry.
“We were able to coalesce a group of leaders in our industry, some of whom had not taken much interest in this heretofore,” he says. “So I think we have a much more aligned industry.”
Despite the Republican majority in the House of Representatives—usually a difficult audience for gaming legalization measures— Jones, a vocal proponent of the federal bill, says she thinks the new bill has a good chance.
“The way it is crafted,” she says, “it is a law-and-order bill. You can either allow the ‘Wild West’ to continue unregulated with no tangible benefits to the U.S. and all of the benefits going offshore, or you can bring it into a regulatory structure, do it the right way and bring those jobs and revenues home.”
Caesars opposed a bill that would legalize intrastate online gaming in New Jersey because it believed the federal bill was preferable. The bill passed and is pending a signature from Governor Chris Christie, but Loveman says that Caesars still favors federal legislation.
“We believe there is a high likelihood of a federal bill,” he says, “so state-by-state is clearly a second-best solution. The states of California and New Jersey just don’t give us enough of a critical mass to really make this business go. So we wind up, just as we do in commercial gaming today, with 48 different tax regimes, regulatory bodies, legislatures that go into sessions at different times. That’s not the legacy I want to hand off.”
Loveman concedes that a New Jersey bill might spur Congress to act sooner than it might have otherwise.
“Reasonable people can draw different conclusions,” he says. “Even on my own management team there is disagreement whether supporting the state initiatives is better or worse. We’re certainly not against the New Jersey bill. So long as we feel we have a better shot at the federal level, we’d like to let that run its course.
Caesars is already in the online business in the U.K. with Caesars Interactive, so it only makes sense for the company to expand it to all other legalized online gaming jurisdictions.
Jones believes the New Jersey bill has many flaws.
“It still doesn’t address a Wire Act fix, a longstanding federal law prohibiting transfers of money for gambling,” she says. “It allows sports betting, which is illegal in the U.S. The Department of Justice has given no indication about which way it would go with this.
“I believe, and the company strongly believes, that the internet, by its nature, needs a federal regulatory framework. It is the only way that gives you the proper framework for a regulatory and enforcement environment. And if you want states to be able to opt out or opt in, you’re still giving attention to states’ rights.”