Podcast Summary
Las Vegas' Entrepreneurial Spirit: From Mid-Tier Chains to Global Empires: Harrah's hired a Harvard professor to innovate their business model, leading to Caesars Entertainment Empire's success, now targeted by private equity groups for buyouts.
Las Vegas has long been a hotbed for entrepreneurialism and innovation in the casino industry, with business models ranging from luxury experiences to mid-tier chains. In the early 2000s, during a boom time in Las Vegas, Harrah's, a mid-tier casino chain, stood out by hiring a Harvard Business School professor named Gary Loveman to help figure out the casino conglomerate model. Fast forward to today, and the Caesars Entertainment Empire, a result of Harrah's success, is once again the target of Wall Street's biggest gambles. Private equity groups, like Apollo Global Management and TPG, have used real estate financing to carry out a leverage buyout, and an obscure regional casino group from Reno, Nevada is set to scoop up the empire in a similar deal. The entrepreneurial spirit of Las Vegas continues to attract investors and business leaders, who believe they can build the next great palace or hotel and bring people from around the world.
Creating a Unique Customer Experience: In a competitive market, personalized experiences and loyalty programs can help attract and retain customers, leading to growth and acquisitions.
In a business where the product itself may be largely undifferentiated, the key to attracting and retaining customers lies in creating a unique and personalized experience. Gary Loveman, former CEO of Harrah's Entertainment, understood this concept well. He recognized that customers were willing to visit a less opulent casino if they felt valued and their experience was customized to their preferences. Loveman implemented a hub and spoke system between Harrah's Vegas properties and regional casinos, allowing customers to collect and accumulate loyalty points. He also used data to understand each customer's spending habits and targeted promotions to them. Harrah's became a serial acquirer, buying up chains and increasing the value of properties through the Total Rewards network. In the early 2000s, Harrah's acquired Caesars Entertainment, and the flagship property, Caesars Palace, joined the Harrah's family. When Loveman sold Harrah's in 2008, he didn't sell it to another casino company. Instead, he sold it to two private equity firms, Apollo Global Management and TPG, who were looking for a casino company with a strong customer base and a proven track record of growth.
Using real estate assets for cheaper financing in acquisitions: Effective financing structures can help secure larger deals, but market timing and economic conditions can significantly impact the purchase price.
Apollo Global Management and TPG Capital took advantage of Harrah's real estate assets to secure cheaper financing through commercial mortgage-backed securities (CMBS) in their acquisition of the company in 2006. This financing structure allowed them to pay more for the company and aim for a bigger return. However, the deal closed in January 2008, just as the financial crisis began, and the seizing of financing markets would have likely resulted in a lower purchase price or a reconsideration of the deal if they had known the economic conditions at the time. This deal highlights the importance of effective financing structures and the risks associated with market timing in large acquisitions.
Casinos hit hard by 2008 economic crisis: Despite their relative resilience, casinos were significantly impacted by the 2008 economic crisis, leading to debt restructuring and asset sales. Unexpected economic events can impact anyone, regardless of financial savvy.
Even smart and wealthy individuals, such as those in the casino industry, were caught off guard by the global economic crisis of 2008. Despite the industry's relative resistance to recessions, the collapse of the global economy led to a significant downturn for casinos, particularly in Las Vegas and Atlantic City. The operating company at Caesars, which held a massive amount of debt, was struggling to stay afloat due to high interest expenses and a lack of profits. Private equity firms implemented debt restructuring strategies, like "amend and extend," to provide more breathing room for the company. However, the slump was severe, and the debt remained massive. Caesars also executed asset sales to raise cash, but interestingly, these sales were to affiliates of the private equity firms themselves. This lesson serves as a reminder that even the most knowledgeable and financially savvy individuals can be blindsided by unexpected economic events.
Hedge Funds Profit from Caesars Entertainment's Bankruptcy: During Caesars Entertainment's bankruptcy, hedge funds benefited from allegedly fraudulent transfers, resulting in a significant windfall when the company emerged from bankruptcy.
During Caesars Entertainment's bankruptcy proceedings in 2015, hedge funds, including Elliott, Apollo, and Oaktree, benefited greatly from the restructuring process. Caesars had sold several casinos to its private equity owners, Apollo and TPG, at allegedly fraudulent transfer prices, leaving creditors with less value. However, the creditors were successful in their litigation strategy, which created leverage for them in negotiations. The value of Caesars was much larger than anticipated, leading to a significant windfall for these hedge funds. Caesars emerged from bankruptcy in 2017, and the casino business was doing well in Vegas.
Caesars Entertainment's Shifting Business Model and Challenges: Caesars Entertainment emerged from bankruptcy and faced governance issues due to hedge funds. The company's focus shifted from gambling to entertainment, shows, and restaurants. Successful residencies like Celine Dion and Britney Spears helped, but competition from various casino formats and missed opportunities in Macau pose challenges.
The casino industry, specifically Caesars Entertainment, has undergone significant changes in the last decade. After emerging from bankruptcy, the company faces challenges with governance due to hedge funds holding equity as part of their settlement. The business model has shifted, with entertainment, shows, and restaurants becoming more important than gambling. Caesars has had successful residencies, such as Celine Dion and Britney Spears. However, the industry is becoming more competitive with casinos in various formats across the country. Caesars missed a major opportunity by not obtaining a gaming license in Macau, which has been a gambling mecca in Asia and was not hit as hard by the global financial crisis. In 2018, there were concerns about a bad year for the Las Vegas casinos, leading to profit warnings and stock price drops. Carl Icahn's involvement, with his experiences in casinos and belief in selling the company, adds another layer of complexity to Caesars' story.
Eldorado-Caesars Merger: Creating the Largest Gaming Company in the US: Eldorado, a growing regional casino company led by Tom Reeg, is merging with Caesars Entertainment to create the largest US gaming company. The deal involves the creation of a REIT called Vici, allowing Eldorado to avoid corporate income tax and take advantage of low interest rates.
Eldorado Resorts, a rapidly growing regional casino company, is merging with Caesars Entertainment to create the largest gaming company in the US. Eldorado, led by Tom Reeg, has grown quickly through acquisitions and synergy creation. The deal relies on the real estate underlying Caesars' empire and the creation of a Real Estate Investment Trust (REIT) called Vici, which will own several Caesars properties and lease them back to the operating company. This structure allows Eldorado to avoid corporate income tax and take advantage of low interest rates, making it an attractive investment in the current economic climate. Despite being a much smaller company, Eldorado is paying a significant premium for Caesars, highlighting the value of Caesars' iconic brand and extensive property portfolio. The merger will result in a gaming giant with 60 casinos across 16 states.
Creative deal making in the casino industry: Caesars sells properties to El Dorado for cash, increasing rent payments and reflecting optimistic business climate, but risks of excessive borrowing remain
The Caesars-El Dorado deal showcases the ongoing trend of creative deal making in the casino industry, despite the potential risks. Caesars is selling properties to El Dorado in exchange for cash to fund the acquisition, resulting in increased rent payments. This new form of debt, while risky, reflects the optimistic business climate where companies believe growth will continue. Caesars, having emerged from bankruptcy, still carries significant debt, and El Dorado is paying a high premium with ambitious synergy targets. The temptation to borrow excessively, fueled by easy access to capital, remains a concern. Suji's upcoming book on the Caesars saga explores the historical significance and pop culture appeal of Caesars Palace and the intense battle between private equity firms and hedge funds. Listeners can learn more from Suji at caesars@ft.com and are encouraged to rate and review the show on Apple Podcasts.
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