In a word, gluttony. In April 2005, then-MGM Mirage paid $7.9 billion to take over Mandalay Resort Group. In a copycat move, then-Harrah’s Entertainment paid $5 billion to purchase Park Place Entertainment. However, rather than pause to pay down debt, both companies embarked upon spending sprees. In addition to MGM Grand Paradise, in Macao (whose cost eventually reached $1.25 billion) and MGM Grand Detroit ($800 million), the company embarked upon CityCenter, a joint venture with Dubai World. This six-tower conglomeration of hotels and condos, plus super-high-end retail and a casino, eventually cost $9.2 billion – and one of its hotels, The Harmon, was found so structurally deficient that it will have to be imploded.
Consequently, MGM finds itself carrying $13.5 billion in long-term debt. It’s still trying to push forward with a second casino-resort in Macao (where the approval process is glacially slow), has offered to pony up $600 million for one in Massachusetts and has even proposed spending as much as $6 billion to create a CityCenter knockoff on the Toronto, Ontario waterfront. Since MGM is rumored to have rebuffed a $1 billion offer for Circus Circus and 85-plus acres of land at the north end of the Strip, the question of how MGM proposes to pay for all this lebensraum remains wide open.
After the Park Place Entertainment takeover gave Harrah’s several additional footholds on the Strip, CEO Gary Loveman proceeded to play Las Vegas Boulevard like a Monopoly board. He purchased the Imperial Palace ($320 million), the Westward Ho ($18 million per acre, which he flipped to Boyd Gaming in return for the Barbary Coast – now Bill’s Gamblin’ Hall), along with real estate stretching all the way back to the western edge of the Hughes Center – as well as overseas operator London Clubs International ($568 million). What Loveman proposed to do with all this acreage remains unclear to this day, as Harrah’s never announced a master plan and subsequent events left the company too financially strapped to do anything bigger than $550 million Project Linq – an under-construction series of restaurants and stores punctuated by a Ferris wheel.
Amidst all this "retail therapy," Loveman seemingly went berserk, approaching private equity firms Texas Pacific Group and Apollo Management to take the company private. The eventual tab was a crippling $28.8 billion – subsequently whittled down to a mere $19.5 billion, largely by persuading underwriters to take a bath on a spectacularly bad investment. This colossal encumbrance, to say nothing of the mammoth interest payments it required, sent the company into shock. Harrah’s pulled back from several European ventures, terminated its conversion of Grand Casino Biloxi into a Margaritaville-branded megaresort (leaving a hulk that is almost certain to be demolished), bailed out of the Kansas market, halted work on Caesars Palace’s Octavius Tower – subsequently resumed and finished – and allowed its Strip properties to fall into an appalling state of neglect.
Not one to be deterred by logic, in late 2007, Loveman paid $580 million for a golf course in Macao. Never mind that Harrah’s didn’t have a casino license there, couldn’t get one and is unlikely to have the opportunity for years and years to come. Despite the hole he has dug for his company – now called Caesars Entertainment – Loveman continues to spend. Like MGM, he is making a run at the Toronto market. He’s got one foothold in Cleveland, Ohio, and soon will have a second in Cincinnati. Caesars is pursuing a $500-million racino in Massachusetts and a comparably expensive one in Florida, and appears likely to have a project soon in Baltimore.
In order to keep expanding, Caesars has to give away the store. It’s a modest minority partner and project manager in its Ohio, Maryland, and Massachusetts ventures, piggybacking onto developers like Cleveland Cavaliers owner Dan Gilbert and racetrack boss Richard T. Fields. To obtain its "Margaritaville" land in Biloxi, Loveman sold two licenses on Lake Charles, Louisiana, to Pinnacle Entertainment. Bad move: Due to its proximity to Houston, Lake Charles is the hottest casino market in the Pelican State and Caesars is on the outside, looking in. Also, to help finance its eastward expansion, Caesars sold the company’s St. Louis-area casino, sacrificing a presence in one major market to try and get into another someplace else.
Both firms would contend – and understandably so – that they need to expand in order to work off their respectively debt loads. But with Caesars and MGM indebted to the tune of an aggregate $33 billion, you have to wonder where they’re going to get the money to keep growing.
