Inside Asian Gaming

48 Said Gordon,“until the transaction closes it’s difficult to see how they can move forward with their [investment] plans unless these are signed off by the new owners.” By the same token,Harrah’s management is too smart not to seize this opportunity to pursue a thoroughgoing reorganization, a process the Caesars acquisition, given its size, had demanded anyway, and no doubt it’s been ongoing. So a lot can happen. And perhaps it al- ready is. Chief Operating Officer TimWilmott resigned after Apollo and Texas Pacific en- tered the picture. He was a 15-year veteran of the company and was considered the No. 3 man behind Loveman and Vice Chairman Charles Atwood. Also gone, as of this writing, are Senior Vice President of Operations Tony Santo and Central Division President Antho- ny Sanfilippo. They will not be the only three of Harrah’s 85,000 employees to go. ‘Really building businesses’ Amongworkers in Europe the transaction economy is setting off alarms. In a statement released by Swissbased IUF,which represents millions of food, hotel and agricultural work- ers,General Secretary RonOswaldblasted the buyout culture as“a serious threat to workers, their trade unions and their communities.” “When company cash flows become merely a source of plunder for investors seeking inflated, short-term windfall gains we are feeding financial markets rather than creating the kinds of enterprises which can provide decent jobs and future perspectives for a Europe which has been living far too long with unacceptable levels of unemploy- ment.” The alarm has spread to Britain, where the Trade Union Congress issued a report last year titled “Investment Chains” attacking not private equity specifically but the culture of “short-termism,” which it claims is threaten- ing jobs and has investment by British com- panies lagging their counterparts on the continent and in the United States. Yet for all this, when the dust settles over Harrah’s what will be clear is that private eq- uity and the casino industry are perfect for each other. Certainly the deal electrified the public markets. “We believe [it] provides for easier entry into the gaming sector by other private equity firms, which should ultimately lead to higher valuations for the group over- all,” CIBC analyst David Katz said in a recent note to investors. As Las Vegas amply shows, the industry’s appetite for capital is insatiable.Globalization is an expensive proposition, and the compet- itive bar continues to rise. In markets every- where, projects that used to run in the tens of millions now cost hundreds of millions to complete, projects formerly in the hundreds of millions now cost billions.The investment- cycle is growing in length and complexity as a result, and this is problematic for many in- vestors in the public markets, where opinion tends to run in 13-week spurts. Private equity may have more than its share of fast-buck artists, but they are far from the rule. As own- ers, fund managers are free to think longer- term and generally they do. “Gaming is a very long lead-time busi- ness, a long growth cycle,” Harms explained, “typically five to seven years.With private eq- uity that sits well.” The gambling world certainly is rich with examples of companies that have grown larger, stronger and more profitable under its stewardship. In Europe, private equity has been a preferred source of funding for the industry for years. “Almost every major UK company has been in private-equity hands at one time or another,” said Harms, whose firm advised Permira on its £200 million in- vestment in casino and bingo operator Gala, which paved the way in 2005 for Gala’s £2.18 billion merger with bookmaking giant Coral Eurobet, a deal in which Global Leisure Part- ners was an advisor and co-investor. Harms holds up Gala Coral as the “poster child, for not only the gaming industry in the UK, but also for the private equity industry in the UK.…This business was taken from $200 million in value eight years ago to $8 billion in value today.” And it was accomplished through investment and capital formation, “really building businesses,”he said. At the IAGR conference he offered other examples: “Morgan Stanley has announced that they’re building a billion-and-a-half- dollar casino resort in Atlantic City. Colony Capital are rebuilding the Hilton in Las Vegas, they rebuilt Resorts in Atlantic City, reinvest- ing into the properties that they acquire and creating more profitable properties, creating jobs and therefore creating higher tax bases in the communities in which they’re operat- ing, as well as profit for themselves.” Fund managers worldwide raised more than $300 billion last year,more than enough money to lavish on a “very attractive asset class,”asHarms describes gaming,an industry known for stable cash flows, good long-term growth prospects, a business model gener- ally impervious to economic downturns, and one commanding a significant amount of real estate which the public markets are not fully valuing, or so many say. The Harrah’s ac- quisition proves that if the issue is price no casino company is beyond their reach. Said Gordon, “Any time the largest gam- ing company in the world goes private it changes the landscape a little bit.” By James Rutherford, International Editor of IGWB. Reprinted with permission from Interna- tional Gaming &Wagering Business magazine Harrah’s Entertainment’s Rio All-Suite Hotel and Casino