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Doubling Down

In a gaming industry where CFOs are big players, two acquisitions reflect very different strategies.
Kate O'Sullivan, CFO Magazine
September 1, 2004

Forget the World Series of Poker. The big game in Las Vegas these days is casino-industry consolidation. In mid-June, Mandalay Resort Group signed a $7.9 billion merger agreement with MGM Mirage — itself the result of a 2000 combination of two big competitors that had been headquartered right across the Las Vegas Strip from each other. Then just weeks after the MGM-Mandalay deal, Harrah's Entertainment Inc. announced plans to buy Caesars Entertainment for $9.4 billion in cash, stock, and assumption of debt. Suddenly, two companies are on track to control two-thirds of the Strip's more than 72,000 rooms.

15,000 Rooms
Both acquiring companies aim to capitalize on a recent burst of strength in Las Vegas gaming by increasing their presence on the Strip. A company "has to take into consideration the market environment," says Harrah's CFO Charles Atwood. But in any consolidating industry, it isn't enough simply to keep up with a rival's growth: deals must be tailored to the specific needs of the combining companies, drawing on their strengths, addressing their weaknesses, and designing the new entity's place in the evolving industry. Viewed this way, the MGM and Harrah's acquisitions are less alike than they might seem.

"Our deal is very different from MGM-Mandalay Bay," says Atwood. "Their deal is more about a big presence in one market, while ours is more about exposure to many markets." He notes that Harrah's currently operates only two Las Vegas properties, with a total of 5,000 rooms: Harrah's Las Vegas and the Rio.

Caesars has four casino-hotels in the city with twice that many rooms — Caesars Palace, Bally's, Paris, and the Flamingo. But after Harrah's and Caesars combine, "no more than 25 to 28 percent of our earnings will come from a single market," thanks to the nationwide diversification of both businesses. Atwood calls the Harrah's-Caesars deal "a continuation of our acquisition strategy," including the recently closed $1.5 billion purchase of Horseshoe Gaming Holding Corp.

The plan is to give customers from Harrah's 28 gambling venues — including Atlantic City and riverboat gaming sites — more Harrah's-owned casinos to play when they hit Vegas. "Customers like to play in more than one place," says Atwood. And right now, "we have customers we turn away in Las Vegas because we don't have enough rooms."

The market has reacted rather skeptically to the Harrah's-Caesars combination, but some see the two companies as compatible. "Bally's and the Flamingo are very much Harrah's type of properties," comments Los Angeles-based Dennis Forst, a gaming analyst at KeyBanc Capital Markets. "And Caesars has a couple of Indian gaming projects, which is the kind of thing that Harrah's is very good at."

If the combined company can succeed in transferring Harrah's technical and operational expertise to Caesars's underperforming properties, "improvement at Caesars would more than cover what they paid," says Carl Noble, a valuation expert. The goal, he says, will be for Caesars to boost its operating margins from 2003's 10 percent to the 16 or 17 percent typical of Harrah's.

The Road to Mandalay
CFOs were instrumental in planning both the Harrah's-Caesars and MGM-Mandalay deals. Glenn Christenson, CFO of Station Casinos Inc., an $858 million Las Vegas concern, believes that the best casino companies possess a winning combination of visionary chief executives who are strong in finance and finance chiefs who think strategically. The top Vegas finance chiefs "also have the financial discipline to operate responsibly, get strong returns on capital, and provide strong returns to the owner," he says.

MGM Mirage president James Murren and Mandalay Bay president Glenn Schaeffer, for example, each hold the title of CFO at their companies. The two were reportedly involved in early discussions about a deal before Mandalay CEO Michael Ensign, MGM Mirage CEO J. Terrence Lanni, and its controlling investor, billionaire Kirk Kerkorian, agreed on terms.

In bringing Harrah's and Caesars together, Harrah's CEO Gary Loveman and Caesars chairman Stephen Bollenbach, who is also the CEO of Hilton Hotels Corp., did much of the early negotiating, with Atwood and Caesars controller and acting CFO Wesley Allison preparing the initial valuations for their boards.

Atwood managed the due-diligence process for Harrah's — an activity that required working closely with Allison because under Sarbanes-Oxley, acquiring companies must certify the financial statements of their acquisitions. "Because we think the deal is unlikely to close before the end of the year, I was reassured by the fact that they were planning to certify [their financial statements] on their side," says Atwood. "That told me they had put a lot of work into it." His next task: facilitating integration, particularly applying Harrah's customer-tracking program, considered the industry standard, at Caesars.


Some think Harrah's will bring management strength to a Caesars franchise that has suffered some serious instability. After being spun off by Hilton Hotels into a gaming company then called Park Place, it acquired the Caesars World franchise and put it together with Bally's, the Las Vegas Hilton, and other properties.

Caesars was also seriously shaken by the death of its CEO, Arthur Goldberg, in 2000. "The disadvantage for Caesars over the past five years is that they have had three CEOs," says Station Casinos's Christenson. He continues, "It's very hard to develop strategies and implement initiatives when there are leadership changes at the top."

A High-Roller Mecca
The two transactions reflect the continuing evolution of Nevada gaming. Mandalay Bay has transformed itself during the past 30 years from its origins as Circus Circus, a lower-end hotel-casino company that helped usher in the era of family-friendly and low-roller establishments. Mandalay has since moved up the food chain, adding chic properties such as a new, all-suite hotel called THEhotel while keeping its Circus Circus brand and others such as the castle-themed Excalibur and the Egyptian-themed Luxor.

The development of Indian gaming and riverboat casinos around the country, which has attracted more of the nation's low rollers, leaves Las Vegas to specialize once again in luxury properties. The merged MGM Mandalay, loaded with such venues, would aim to cash in on this trend. MGM Mandalay would also control one of the last undeveloped parcels of land on the Strip.

Wall Street's feeling is that the combination may have come just as Mandalay reached the top of its game. "It was probably not a bad time for Mandalay to sell. Their business can't get a whole lot better than it is," says analyst Forst.

The top executives at MGM Mirage and Mandalay also "realized that, outside of Indian-reservation casinos, gaming is a mature industry, and if they want to boost their stock price, they have to grow the peripheral [nongaming] revenues," adds Ray Neidl, a gaming analyst with Blaylock & Partners in New York. In 2003, each company drew 50 percent or more of its revenue from nongaming sources, which include hotel rooms, restaurants, and entertainment such as concerts.

Neidl also believes that MGM Mirage may see a new, CFO-trained future CEO in the person of 49-year-old Schaeffer, widely regarded as a top talent in Las Vegas. "The chief executive of MGM Mirage may retire when his contract terminates [in 2006], and the company may have bought itself a good manager," the analyst says. (Neither Schaeffer nor MGM's Murren would comment for this story.)

Demolition Derby
The action in Las Vegas certainly isn't limited to MGM-Mandalay and Harrah's-Caesars. Gambling mogul Donald Trump filed construction plans in July for a $300 million hotel and tower to be built with Phil Ruffin, owner of the Frontier Casino.

In addition, former Mirage impresario Steve Wynn has begun work on Wynn Las Vegas, a $2.4 billion project on the former site of the Desert Inn. And Sheldon Adelson, owner of Las Vegas Sands Inc. and operator of the Venetian, is planning a megaresort, called the Palazzo, next to his existing Venetian property. Las Vegas Sands is also planning a public offering, and has landed a coveted license to build a casino in Macao, a major attraction in the growing international gaming market.

Also hoping to cash in on Vegas's hot streak, casino operators Boyd Gaming Corp. and Coast Casinos just closed a $1.3 billion merger that combines such smaller Strip properties as the Stardust and Barbary Coast, along with off-Strip casinos like Sam's Town.

Ellis Landau, Boyd Gaming's CFO, expresses enthusiasm about the megadeals that have followed his own M&A activity. "We will hopefully be sharing in that boom," he says. "It really validates our strategy when you see that people are willing to spend billions of dollars of shareholders' money on Las Vegas Boulevard."

It's possible, he suggests, that postacquisition divestitures could put other Strip properties on the market. "If something became available," says Landau, "we would have to make a determination about whether we wanted to do an acquisition rather than a new build" (see "A Matter of Trust," at the end of this article).

As casino owners vie to outdo one another with opulent new locations, there are likely to be more than a few casino tear-downs — bringing more of those spectacular demolition scenes that appear every so often on the nightly news. A few older candidates: the Frontier, the Stardust, and the Tropicana, the last owned by Phoenix-based Aztar Corp. (Although Landau says there are no immediate plans for renovation, he acknowledges that both the Stardust and Barbary Coast "could be redeveloped at some point.")


"One of the things that makes Vegas so intriguing is that it's constantly changing," says Station Casinos's Christenson. "The face of the Strip 10 years ago was dramatically different than it is today, and that's what gives us a competitive edge as a destination."

Even if there will be fewer competitors. While Forst expects a quiet period in which the acquiring giants will "need to digest these deals," he and others see more acquisitions as inevitable. Harrah's Atwood agrees. "I would not be surprised to see more consolidation," he says. "There are lots and lots of smaller companies."

Kate O'Sullivan is staff writer at CFO.


A Matter of Trust

The MGM-Mandalay and Harrah's-Caesars deals will certainly create two gaming giants. But will they be as big as the companies intend?

"There will be more regulatory scrutiny on the two deals than either one would have had on its own," says KeyBanc Capital Markets gaming analyst Dennis Forst. And whether divestitures will be required will depend on how the Federal Trade Commission defines the competitive market geographically. If regulators look carefully at city markets such as Las Vegas and Atlantic City, where the merging companies have significant concentrations of hotel-casinos, some property sell-offs may be required.

Top executives at the merging businesses, however, expect few such constraints. MGM Mirage president and CFO James Murren told analysts that the company had carefully vetted the deal with lawyers, taking into consideration both federal antitrust concerns and state regulations.

While the company must shed one property in Michigan, where state law prohibits any casino operator from holding more than one license, he says, "we have no intention at this time of divesting any other properties."

Harrah's CEO Gary Loveman told analysts it was "likely" that the company would divest properties in Mississippi, Indiana, and possibly in Lake Tahoe, Nevada. The issuance of new licenses in the Pennsylvania market, Loveman suggests, may lessen the impact of Harrah's and Caesars both having an Atlantic City presence.

But some in the industry speculate that the combined MGM Mandalay will eventually unload at least one Strip property — Mandalay's Luxor, Circus Circus, and Excalibur are candidates — and suggest that Harrah's Atlantic City concentration could cause FTC concerns. In both the MGM and Harrah's cases, "there may be an opportunity for some little guys to acquire some choice properties that get divested," says Ken Ritt, a partner in Stamford, Connecticut, law firm Day, Berry — Howard.

The two casino giants are prepared for long government reviews. MGM expects its deal to close in the first quarter of 2005, while Harrah's says its may be finalized as late as July. —K.O'S.


Strip Poker
Vegas properties involved in the MGM-Mandalay and Harrah's-Caesers deals.
Properties Number of Rooms Percent of Strip Total
Paris Las Vegas (Caesars) 2,916 4.0%
Bally's Las Vegas 2,814 3.9
Caesars Palace 2,423 3.4
Harrah's Las Vegas 2,575 3.5
The Rio (Harrah's) 2,548 3.5
MGM Grand Las Vegas 5,034 6.9
The Mirage (MGM) 3,044 4.3
Bellagio (MGM) 3,005 4.2
Treasure Island (MGM) 2,885 3.8
New York New York (MGM) 2,024 2.8
Boardwalk (MGM) 654 0.9
Luxor (Mandalay) 4,408 6.0
Excalibur (Mandalay) 3,991 5.5
Circus Circus (Mandalay) 3,770 5.2
Mandalay Bay 3,215 4.4
Monte Carlo (Mandalay) 3,002 4.2
THEhotel (Mandalay) 2,233 1.5
Total 50,541* 68.0%
* of 72,264 on the strip
Sources: Lasvegas.com and Las Vegas convention and visitors authority. Additional reporting provided by Molly McDonough



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