Caesars sale may happen this week

Gary Thompson

Monday, April 26, 1999 | 2:59 a.m.

Barry Sternlicht may bring the gavel down on the bidding for Caesars this week.

After months of speculation, the Starwood Hotels & Resorts chairman is expected to choose between reported competing offers for the coveted Caesars World hotel-casinos.

By all accounts, the bidding is down to just two serious contenders -- Mirage Resorts Inc. and Park Place Entertainment. And by some accounts, the choice will be made soon.

"Barry knows he can't sit with those casinos for six more months or his shareholders will crucify him," said a hotel executive who requested anonymity.

"Starwood stock has run up in recent days in anticipation of a deal. If he doesn't do it soon, the stock will tank. And Barry needs to sell more than Arthur needs to buy."

"Arthur" is Arthur Goldberg, the Park Place president who's made no bones about his desire to acquire Caesars. Some analysts view Park Place as the front runner in the race for Caesars, dismissing Mirage as little more than a stalking horse.

Others, though, say Caesars is a legitimate and logical acquisition for Mirage, despite the long-held preference of its chairman, Steve Wynn, to build rather than buy hotel-casinos.

Goldberg has bid $2.9 billion for Caesars and isn't likely to go higher. He's told associates he believes he can slash $250 million of costs annually by combining corporate functions, trimming Caesars' payroll and through other measures.

Reports of a competing $3 billion offer by Mirage have prompted skepticism from some gaming analysts, while others argue that the company could more easily afford to acquire Caesars than Park Place.

A Park Place-Caesars merger would result in a company owning 28 casinos, by far the largest, most geographically diversified gaming company in the world.

But a Caesars purchase would give Mirage a stretch of high-end hotel-casinos running south along the Las Vegas Strip from Treasure Island through The Mirage, Caesars Palace, Bellagio, 50 acres Mirage has earmarked for a new resort and down to Monte Carlo, a joint venture between Mirage and Circus Circus Enterprises Inc.

"I think Mirage is the front runner," said Joe Coccimiglio of Prudential Securities. "Mirage stock trades at a higher multiple, it has less debt than Park Place and its cost of borrowing is lower.

"It would link all those Mirage properties on the Strip together and make it a massive leader in the high end of the business," he said.

"The company could make some tremendous cost savings in its overseas marketing by combining Caesars and Mirage offices abroad. And it would give Mirage immediate geographic diversity."

That includes an immediate presence in Atlantic City, where Mirage's planned Marina District hotel-casinos won't open until at least 2002.

"Caesars Atlantic City makes this a very interesting deal," said David Wolfe of CIBC Oppenheimer & Co. "If it is acquired by either Mirage or Park Place, you're talking about the second-largest gaming market becoming less fragmented.

"Atlantic City would be down to 12 facilities controlled by three or four operators -- Donald Trump, Harrah's and Park Place or Mirage -- and you'd run less risk of kamikaze promotional wars.

"I don't think you'd run into antitrust concerns because under current law no one company can own more than three facilities in Atlantic City anyway," Wolfe said.

"But you'd be buying existing properties at Caesars that provide tremendous cash flow. I think the financing is attainable for Mirage or Park Place. And if you're a buyer of assets, you have to be bullish on the market long term. And casino operators are bullish on the market."

Sun International, which operates casinos in Connecticut, Atlantic City, the Bahamas and South Africa; and Circus Circus and MGM Grand have all been mentioned as possible contenders for Caesars, but analysts say each is a long shot.

Harrah's Entertainment, which bought Rio and Showboat last year and is moving its headquarters to Las Vegas from Memphis, isn't considered in the running.

"Any time assets come up for sale, a logical buyer should peek under the hood," said Wolfe. "But having just spent some time with (Sun Chairman) Sol Kerzner, I know he is interested in Las Vegas over the longer term, but the asking price for Caesars wasn't good enough to change his time line.

"You can think about MGM, but MGM has a very sharp focus on Detroit. And I think they are concentrating on producing as much cash flow out of the three properties at Primm, Nev., as they get from New York-New York," Wolfe said.

"Circus is focused on managing its current portfolio, building in Detroit and reducing debt. But Arthur Goldberg and (Mirage Chairman) Steve Wynn have always had their eyes on Caesars."

"The most likely contender is Park Place," said David Anders of CS First Boston. "Caesars is a good fit geographically and strategically, because Park Place needs a higher-end casino brand.

"I personally don't believe Mirage is a very serious bidder," Anders said. "Mirage could finance the deal, but it runs the risk of downgrades because of the increased debt level. And strategically, it's very difficult to run three high-end casino resorts such as Caesars, Bellagio and Mirage.

"ITT Corp. had problems doing that with Caesars Palace and the Desert Inn, which has sort of withered on the vine. You see a little bit of the same problem with Bellagio and Mirage."

"Caesars is the last large acquisition in the business," said Andrew Zarnett of Ladenburg Thalmann & Co. He noted its purchase would give the successful buyer about half a billion dollars of extra cash flow annually.

"It would take Park Place from $800 million to $1.3 billion in cash flow, including cost savings and synergies.

"It would take Mirage from $750 million to $1.25 billion. If Wynn bought it, he could decide to sell Caesars Atlantic City. There'd be a high probability he could sell to Park Place, because that would make a lot of sense.

"But it's a better fit for Park Place because they're not really in the high end of the business and this gets them there," Zarnett said.

CIBC Oppenheimer's Wolfe agreed with part of that rationale.

"Caesars would bring Park Place a new customer segment, from middle and upper middle to top-of-the-line," Wolfe said.

"But Mirage could get a great stretch of contiguous properties in Las Vegas, which would in a sense press their leverage. That would work good in boom times, because they'd have high volumes of high-level plan when the city's running strong.

"Of course, it could work just the opposite when high-end play slows down, and they'd feel that more than they currently do."

The analysts believe that the sooner the sale is made, the better for all concerned -- especially the employees of Caesars World.

"How good can you feel if you know you're the unwanted stepchild?" said Wolfe. "How do you like it when Starwood decides to reinvest dollars and the money goes first to Sister Westin and then to Brother Sheraton?"

Westin and Sheraton are two of Starwood's hotel brands.

"Caesars is clearly up for sale, and whenever a corporate entity makes an announcement like that, it tends to act quickly to avoid employee unrest and bad morale," said Anders. "Caesars World has already lost the head of its Atlantic City casino to Mirage, and another top executive left to go to MGM.

"Right now, Caesars is in a holding pattern and that's not good for its employees, especially when there are new properties willing to hire the best and brightest."

It isn't certain whether the Desert Inn, which has failed to produce a positive return on investment despite a recently completed renovation, would be part of the deal. But Wolfe said that might not necessarily be a deterrent.

"Steve Wynn likes to develop, and there's about 35 acres of vacant land plus the golf course involved in the Desert Inn," he said. "From Arthur Goldberg's standpoint, even if he doesn't want to develop, he's a value guy and would be buying some good land that could be swapped at some point.

"The bottom line is that Caesars is still one of, if not the highest, recognized names in the gaming business," Wolfe said. "It has tremendous value.

"That in itself won't necessarily translate to a successful purchase. It will come down to maintaining the physical plant and executing the right service strategy. And Mirage's service is second to no one."

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