Gary Loveman’s role with the new Caesars Entertainment, formerly Harrah’s Entertainment, has changed. Caesars has recently been taken private by private equity companies Apollo Management and Texas Pacific Group. Loveman holds the same titles, but his attention has turned to different things. At the East Coast Gaming Conference in May, he talked with Casino Connection Publisher Roger Gros about the differences between operating a public and a private company, and explained how the company’s previous expansion plans stand now. To hear a podcast of the full interview, visit www.casinoconnectionac.com and click on the Boardwalk Podcast button. Casino Connection: Now that Caesars is a private company, how does it change your job? Loveman: It’s changed my job a fair bit. There’s a whole process to managing communication in a public company that’s not particularly valuable but is an obligation, and an important one. I no longer have to be attentive to that, so I have more time to devote to the folks I work with and customers and businesses we’re looking after. I have an extremely capable, enterprising group of partners in my two private equity firms who are really quite helpful. They’re owners of the company, so you answer to them as you once answered to the public shareholders. How does that dynamic work? Do they oversee it more than shareholders do? They tend to be more involved in the substance of what we could do to grow value. They’re not asking how we market Showboat Atlantic City. They’re very involved in where we apply capital, what markets we’re going to enter, who our partners are going to be, these sorts of things. I find that quite constructive. Is there a cap on capital reinvestment in any Harrah’s properties? We understand you’ve scaled back on some expansion plans. We don’t put a cap on it, but we put a higher rate of expected return. For a public company borrowing at 6 percent or 7 percent, a project with a 9 percent or 10 percent expected return was in the shareholders’ interest, and we would pursue it. Today, in a much tighter market with private owners who expect higher rates of return, 9 percent on a buffet remodel is not feasible. It pushes us to be more innovative and smarter. Any deserving project can get funded, but “deserving” is a higher bar than it used to be. Let’s go through some of the projects that were announced prior to the buyout, starting with the big center Strip project on the land you own in Las Vegas. Is that on hold? No, we’re actively proceeding, but it’s a much more complicated undertaking. We’re trying to architect a plan amid a bunch of businesses that operate and are very successful. That’s a very different thing than tearing everything down and building something afresh. We have a $1.2 billion Caesars Palace expansion that’s almost halfway along. We have an arena that will begin construction later this year. We have a variety of other projects that we’ve made some noise about publicly here and there that are centered around building out this plan, and you’ll hear more about this over time. The last thing we want to do is take seven successful businesses and turn them into one big construction zone and discourage anyone from wanting to be around Flamingo and Las Vegas Boulevard. So we’ll do this sequentially. How about in the regional properties? We’re opening the biggest, fanciest casino in the Midwest in August—Horseshoe Hammond. Absolutely beautiful place, and I think it will really redefine the experience in that part of the country. There’s a lot going on. It’s the biggest capital-spending year in the history of the company, and another one next year. Internationally you’ve decided not to go through with a couple of projects—the Slovenia development and the Bahamas. Were there different reasons for each one? In Slovenia, we just couldn’t reach an agreement with the government. We still like the idea, but remember, this is a legacy communist regime that is really trying to work through a series of reforms that include tax rates, international inward investment—after a long period of working on it, we just couldn’t get there. Rather than keep banging our heads on it, we decided to stand down and see what happens. We unfortunately withdrew in the Bahamian case because our partner there couldn’t get far enough along quickly enough to make the project feasible. The U.K. is going through as tough a time as any gaming jurisdiction. Is this something that you hope the government will respond to quickly? The government of Prime Minister (Gordon) Brown has been a terrible disappointment—raising tax rates, really working backward. Of course that comes on the heels of decades of an institutional establishment that discourages visitation to casinos in general. We feel like we have good businesses. We have a lot of new ones that are larger and more Vegas-like, if you will, than what preceded them. Over time they’re going to do well, but it’s been a disappointing start. It’s tough to drive visitation there. People have attitudes about casinos; they consider them to be very exclusive, upper-class, stilted kinds of places, and it takes time to overcome that. You’ve talked about non-gaming amenities and their return on investment. That’s been a success in Atlantic City and Las Vegas. Is this something you look at very closely before you consider it for your other properties? We look at it everywhere. It all has to do with the economics. You see non-gaming amenities arrive in jurisdictions where the gaming tax rates are reasonable, since you can help monetize the costs of these big developments in the casino at a reasonable rate of tax. But you could never build a beautiful amenity in Illinois, where the gaming tax rate takes all the benefit. These things are very much coupled. The challenge is that the revenues and margins associated with the non-gaming amenity tend to be anywhere from zero to a very small number, and can’t support enormous investments unless they’re monetized in the casino or in some other innovative way. That’s the challenge. At the margin, that’s where a lot of these projects are failing. Gaming has had a difficult run in Massachusetts, Maryland and Kentucky. Is that just the cycle we always go through, or is it something deeper? I think it’s something deeper. Since 1992, we’ve had three states make it into gaming. That’s extraordinary, because you need a perfect alignment of legislative, gubernatorial and business leadership to make this work. Those are very tough to find. The progress has been very modest, even in a state like mine, Massachusetts, where everybody acknowledges, without debate, that nearly $1 billion of Massachusetts revenue goes to Connecticut Native American facilities. There isn’t any debate about whether the residents ought to gamble—that issue’s long gone. It’s just a policy-making issue, and in Massachusetts this issue is still active. We went down to pretty spectacular defeat this year. I’m not encouraged. I think the industry needs to do a much better job of communicating the merits of what we propose. Where do you think Harrah’s is going to be in five years? Is this going to be a typical public equity buy where they hold it for five or six years, then spin it back public? I suspect an exit through a public market offering is the most likely result; how many years is hard to tell. There would have to be some large strategic investor—given the size of the company, it would have to be a very large investor, a sovereign country’s investment entity or something like that. So it could come back in as parts of a public company? It would be a public company but a large number of shares would remain with management in the private equity firms. That wouldn’t be any different than (Kirk) Kerkorian’s ownership of MGM or (Sheldon) Adelson’s ownership of Sands or the Ferttitas’ ownership of Station when it was public.
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