{"id":510,"date":"2008-05-23T16:59:00","date_gmt":"2008-05-24T00:59:00","guid":{"rendered":"https:\/\/www.lasvegasadvisor.com\/blogs\/dmckee\/index.cfm\/2008\/5\/23\/Harrahs-Buy-or-Sell"},"modified":"2022-10-09T06:30:32","modified_gmt":"2022-10-09T14:30:32","slug":"harrahs-digging-to-china","status":"publish","type":"post","link":"https:\/\/www.lasvegasadvisor.com\/stiffs-and-georges\/harrahs-digging-to-china\/","title":{"rendered":"Harrah's: Digging to China"},"content":{"rendered":"

Given the recent freeze-out on new casino operators in Macao<\/b>, executives at Harrah\u2019s Entertainment<\/b> might as well be sporting T-shirts that read, \u201cI spent $577.7 million in Macao and all I got was this lousy golf course<\/a>.\u201d And, in light of Harrah\u2019s considerable debt load, CEO Gary Loveman<\/b> will have the unenviable task of advising tight-fisted co-owners TPG<\/b> and Apollo Management<\/b> what to do next with their expensive piece of Chinese real estate.<\/p>\n

They could gamble on hunkering down for a few years, taking a low near-term return while waiting for Macao supremo Edmund Ho<\/b>\u2019s successor to possibly liberalize the enclave\u2019s gaming regime, admitting new corporate players. Or Loveman could try to peddle it around — probably at a loss, seeing as the land can\u2019t be rezoned for gambling and he\u2019s dealing from a position of weakness.<\/p>\n

(A third option, whereby Harrah\u2019s acts as a passive hotel operator as part of a joint venture in which Wynn Resorts<\/b> or MGM Mirage<\/b> owns the casino just seems too transparent and disingenuous to get past the current regime, IMO. It\u2019d be obvious a subversion of the \u201cthree-plus-three\u201d arrangement, turning it into 3 + 3.5.)<\/p>\n

The fate of the golf course is a pressing question only because Harrah\u2019s latest \u201cConsolidated Summary of Operations\u201d contains some scary-looking numbers. When 1Q08 is compared to 1Q07, interest expense has increased threefold (from $185.8 million to $557.6 million). Pile on $211.3 million in early retirement of debt \u2013 to reduce those interest payments \u2013 and an 11% decline in income from operations and it\u2019s quite a jolt to the balance sheet. In the 1\/28\/08-3\/31\/08 period, combined income of $445.5 million was negated (and them some) by $679.2 million in interest expense and early debt retirement.<\/p>\n

Then there\u2019s the matter of the shuffling of properties between Harrah\u2019s Entertainment and Harrah\u2019s Operating Co.<\/b> According to one analyst, it works like this …<\/p>\n

Harrah’s Las Vegas, The Rio<\/b>, the Flamingo<\/b>, the A.C.\u00a0Harrah’s<\/b> and Showboat<\/b> Atlantic City<\/b>, Harrah’s Lake Tahoe<\/b>, Harvey’s<\/b> and Bill’s Lake Tahoe<\/b> are going into the Entertainment portfolio, to be followed by Harrah\u2019s Laughlin<\/b> and Paris-Las Vegas<\/b>. But then Bill\u2019s, Harvey\u2019s and Harrah\u2019s Lake Tahoe, and Showboat are re-shuffled into the operating company.<\/p>\n

(What? No mention of Bally’s Las Vegas<\/b>? Hmmmmmmmm. Why does the word “implosion” keep bouncing through my brain?)<\/p>\n

In an excellent analysis<\/a>, Amy Calistri<\/b> writes, \u201cReducing interest expense, through the reduction of debt, has to be at the heart of this accounting tangle.\u201d In other words, Harrah\u2019s is positioning itself for a big sell-off, fleeing the Tahoe market and reducing its high Atlantic City exposure, already worsened by good business at Harrah’s Chester<\/b>. Trouble is, Calistri goes on, casino valuations aren\u2019t what they used to be and potential buyers might still find credit scarce.<\/p>\n

(The problem with operator consolidation is that it\u2019s taken a lot of potential buyers off the table \u2013 no more Argosys out there — although Ameristar Casinos<\/b> needs to rack up some debt to reduce its profile as a takeover candidate. Penn National<\/b> is in a buying mood but, with its private-equity buyout threatening to unravel, it\u2019s got hassles of its own.)<\/p>\n

As for the cheese-paring moves that customers are reporting at Harrah\u2019s Strip properties, Calistri warns that \u201ccost cutting and efficiency will only help [Harrah\u2019s] at the margins …\u00a0Indeed, Harrah’s biggest hurdle toward profitability over the near term is likely to be undoing the debt associated with their acquisition.\u201d<\/p>\n

Which is why when analysts float the idea of Harrah\u2019s buying Galaxy Entertainment<\/b> as a quick means of entry into Macao, I\u2019m tempted to employ one of my Mom\u2019s favorite retorts: \u201cUsing what for money?\u201d Galaxy has its problems (like basically learning the casino business on the job) but with no new gaming concessions on the Macanese horizon, its value just shot up considerably.<\/p>\n

And then there\u2019s the little detail of a $2.8 billion (with a \u2018B\u2019) tribal court judgment<\/a> against Harrah\u2019s that, if it continues to stand up (much data here<\/a>), will lumber the company with even more<\/i> debt and interest. The verdict isn\u2019t really Harrah\u2019s fault: The case dates back to when Arthur Goldberg<\/b> was alive and running Park Place Entertainment, which became Caesars Entertainment<\/b>, which was bought by Harrah\u2019s Entertainment, which is contemplating changing its name to \u2026\u00a0 Caesars Entertainment.<\/p>\n

It\u2019s a good thing Apollo and TPG hung onto Loveman, just in case their casino acumen is on par with Apollo\u2019s retail acuity. Earlier this month, Apollo vassal Linens \u2018n Things<\/b> filed for bankruptcy in what Bloomberg<\/b> called \u201cthe biggest leveraged buyout failure since credit-market disruptions began last summer,\u201d and what one analyst characterized as \u201can utter and complete disaster.\u201d The company will close 20% of its stores, leaving 2,500 people unemployed.<\/p>\n

Apollo\u2019s exposure is only (\u201conly\u201d) $260 million, meaning that others, primarily General Electric,<\/b> are holding most of the bag on this debacle. And maybe the timing wasn\u2019t so good for taking real estate franchisor\u00a0Realogy Corp.<\/b> private for $8.5 billion, either. (Bloomberg<\/em> says $6.6 billion.)<\/p>\n

And don’t forget about Harrah\u2019s unraveling international strategy, which was ill-timed at best and possibly a total bust. But that\u2019s a topic for another time …<\/p>\n","protected":false},"excerpt":{"rendered":"

Given the recent freeze-out on new casino operators in Macao, executives at Harrah\u2019s Entertainment might as well be sporting T-shirts that read, \u201cI spent $577.7 million in Macao and all I got was this lousy golf course.\u201d And, in light … Continue reading →<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[40,23,7,62,11,69,95,9,20,38],"tags":[],"_links":{"self":[{"href":"https:\/\/www.lasvegasadvisor.com\/stiffs-and-georges\/wp-json\/wp\/v2\/posts\/510"}],"collection":[{"href":"https:\/\/www.lasvegasadvisor.com\/stiffs-and-georges\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.lasvegasadvisor.com\/stiffs-and-georges\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.lasvegasadvisor.com\/stiffs-and-georges\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.lasvegasadvisor.com\/stiffs-and-georges\/wp-json\/wp\/v2\/comments?post=510"}],"version-history":[{"count":4,"href":"https:\/\/www.lasvegasadvisor.com\/stiffs-and-georges\/wp-json\/wp\/v2\/posts\/510\/revisions"}],"predecessor-version":[{"id":31728,"href":"https:\/\/www.lasvegasadvisor.com\/stiffs-and-georges\/wp-json\/wp\/v2\/posts\/510\/revisions\/31728"}],"wp:attachment":[{"href":"https:\/\/www.lasvegasadvisor.com\/stiffs-and-georges\/wp-json\/wp\/v2\/media?parent=510"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lasvegasadvisor.com\/stiffs-and-georges\/wp-json\/wp\/v2\/categories?post=510"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lasvegasadvisor.com\/stiffs-and-georges\/wp-json\/wp\/v2\/tags?post=510"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}