This is the online home of David G. Schwartz, who Billion-dollar musing in the LVBP
In the midst of all the talk about Vdara, I thought I’d mention my latest article in the LVBP:
While doing some research, I recently happened across an article in the July 1997 issue of Casino Executive magazine in which then-Harrah's Entertainment CEO Phil Satre sounds downright oracular.
“If you're the last person to build that last $1 billion project in Las Vegas,” he told the magazine, “you might be wishing you hadn't spent your money that way.”
Today, it seems obvious that he spoke correctly. Many people still come to Las Vegas, but their numbers don't seem as boundless. Those who bet on a constantly expanding market for what Las Vegas offers look to be guilty of irrational exuberance at best, while most of the rest of us are wondering why so few people were betting against that kind of growth.
It’s an elaboration of an idea I started in a post here two weeks ago. Interesting timing in regards to two events this week: the opening of City Center and Harrah’s looking to buy Planet Hollywood.
As for my thoughts on the latter, I don’t think that when you look at Harrah’s Entertainment you can say that one of the company’s problems is not having enough hotel rooms on the Strip. On that level, this move just doesn’t make a lot of sense to me. Do having another 2,500 rooms to fill justify taking on additional debt to buy a traditionally troubled property? Since Planet Hollywood is clearly not a “turnkey opportunity” with a guaranteed cash flow, I don’t understand why the company would use this money to buy another Strip property as opposed to expanding a regional operation somewhere else and diversifying their cash flow.
Also, this is a very 1990s type of expansion, in that the company is spending a great deal of money to buy an asset that may produce revenue. Contrast this deal with MGM Mirage’s latest moves, signing development agreements and management contracts overseas that don’t require it to buy any assets but will allow for cash flow. Like I said in my review of Managed by the Markets, this is what companies in other sectors are doing and, within the constraints of today’s markets, seems to be a better strategy for delivering value to shareholders (or bondholders).
And it’s amazing that twelve years ago Harrah’s CEO was so hesitant to buy or build a second property on the Strip, while now the company is charging ahead to buy its tenth casino there. It’s a totally different company.
Posted in business of gamblingon 12/02/2009 08:58 am by Dave
12/02/2009 at 12:00 pm
>Its a totally different company.
A transformation not voted on by shareholders and probably not fully disclosed to the board initially.
Management contracts can be voided, litigated to death or can simply expire. Assets are owned. Perhaps the tangible asset is less favored on Wall Street than the imagined cash flow from the contract but bricks tend to outlast the contract to polish them.
Ofcourse Harrahs or whatever their real name is did accomplish this transformation by fully earning its nickname of Evil Empire and its business model focuses large on shearing the sheep rather than valuing informed gamblers.
12/02/2009 at 2:06 pm
^^^
The bricks do outlast the contract, but not always to their builder’s benefit–Bob Stupak and the Strat is a good example. I think the OEM model is pretty strange, but it seems to be popular, and it’s curious that Harrah’s is eschewing it, even though they’ve had their nose bloodied in their attempts to build/buy in foreign markets (particularly Slovenia).
12/03/2009 at 7:47 am
Dr. Dave, The one thing I like about this transaction is that I actually like what PH did with the re-model. The fault in the PH equation was that while they purchased the property for a good price, they certainly spent too much on its rehab and rebrand which current business levels do not support. If Harrah’s can get this well positioned and newly reinvigorated property at an appropriate debt level, then hey, why not go after it! Add on top of that economies of scale, which PH does not have, and Harrahs may be able to make this deal really work favorably for them. Arthur Goldberg first thought of it and I believe his intention for a Bally’s, Paris, Aladdin/PH line up would have worked well then and can certainly benefit Harrah’s now.
On a side note, I said this on another website. Just for fun…Imagine the strip’s first “Horseshoe” directly across from City Center? A legendary name in gaming stares across the street at what some have called gaming’s future.
12/03/2009 at 11:45 am
I really like what Planet Hollywood did with both the inside and the outside of the casino (those big LED screens out front) once they purchased the Aladdin out of bankruptcy in June of 2003. It took a long time and obviously way to much money but I thought it turned out really good.
Now the “vulture” Harrahs swoops in and gets a great deal on Planet Hollywood and if they do get it I think they will put the “Horseshoe” brand name on it like the American Gaming Guru mentions above. Harrahs should finish the Octavius Tower over at Caesars Palace before they buy Planet Hollywood but CEO Gary Loveman seems to be able to do whatever he wants in Las Vegas even though his company is billions and billions of dollars in debt.