Caesars sold for $3 billion

Gary Thompson

Tuesday, April 27, 1999 | 11:17 a.m.

Park Place Entertainment Corp. of Las Vegas said today it signed a definitive agreement with Starwood Hotels & Resorts Worldwide Inc. to buy Caesars World Inc. for $3 billion cash.

The blockbuster deal creates by far the world's largest gaming company, with combined revenues of $3.57 billion and cash flow of $874 million in 1998. It weds 17 Park Place casinos with 11 Caesars operations worldwide.

The deal excludes The Desert Inn, the Las Vegas Strip resort that Starwood has been trying to sell for more than a year. It also excludes the Caesars non-gaming resorts in the Poconos.

For the year 2000, analysts expect the merged company to generate about $1.2 billion of cash flow, nearly a half billion dollars more than that estimated for the next largest company, Harrah's Entertainment.

Park Place stock soared 20.5 percent to $11 a share, up $1.875, in extremely heavy midday trading today, while Starwood stock was off 87.5 cents, or 2.5 percent, to $34.125.

"This is the most significant event ever in the gaming industry," said Andrew Zarnett of Ladenburg Thalmann & Co.

"Marrying Park Place with Caesars gives Park Place President Arthur Goldberg the dominant position in the industry and creates a company with cash flow equivalent to that of many Fortune 500 companies.

"This is the third time he's taken large companies and put them together. He fully understands the process and the challenges," Zarnett said.

"This is a done deal," said David Anders of CS First Boston. "Park Place just has to raise the debt and we think they'll be able to maintain an investment grade rating that would put the interest rate in the 8 percent range."

Park Place currently has about $2.5 billion of debt outstanding and is likely to raise the additional $3 billion through bank borrowings and the sale of additional debt securities.

"From an evaluation perspective, about $140 million of the purchase price was related to vacant land in Las Vegas and Atlantic City," Anders said. The acreage doesn't include about 35 acres near the Desert Inn.

"So the purchase price for the Caesars assets was about $2.9 billion, or a little over seven times estimated year 2000 cash flow, which is a very reasonable value," Anders said.

"The Park Place stock move really doesn't surprise me," he said. "Park Place itself should generate about $800 million in cash flow in the year 2000, while the Caesars properties should add another $400 million.

"That should equate to about $1.45 in free cash flow per share, and gaming stocks should trade at about 10 times their free cash flow."

Free cash flow is net income plus depreciation minus maintenance capital spending.

Anders said Park Place may consider renaming the company to capitalize on the Caesars brand, considered by many the world most recognizable name in gaming.

"In the interim," Ander said, "you could see some of the existing facilities being rebranded 'Caesars,' such as the Grand Casino in Tunica."

Today's announcement culminated a seesaw battle that heated up over the past few days as Park Place and Mirage Resorts Inc. each briefly held the lead in the race for control of the coveted Caesars brand.

As recently as Saturday, Mirage Chairman Steve Wynn was trying to buy selected Caesars assets, including the flagship Strip resort in Las Vegas.

The following day, Goldberg told confidants he was the leading bidder.

In the end, Starwood Chairman Barry Sternlicht opted for the Park Place offer, primarily because it covered all the Caesars division gaming properties except for the Desert Inn.

Since acquiring the Caesars casino operations in the ITT Corp. merger last year, Sternlicht has been uncomfortable with the volatility of gaming -- especially the high-end brand practiced at Caesars properties -- and has opening acknowledged the gaming business was for sale.

"The volatility of the high end of the gaming business and the requirements of the business for major ongoing capital investment were key to our decision to sell Caesars, which remains the most recognized name in the gaming industry," Sternlicht said today.

"We are very pleased that we could come to an agreement with a world-class owner/operator like Park Place Entertainment headed by Arthur Goldberg at a price that makes the transaction accretive for Starwood."

"This transaction meets all the conditions we established for making an acquisition," Goldberg said. "It provides strategic assets, it should be accretive to earnings in the first year, and it has potential for future growth opportunities."

"We are obtaining an internationally recognized brand name and a portfolio of premier gaming assets.

"These assets enhance our geographic diversification by providing an immediate leadership position in Indiana, the fifth largest gaming market in the United States, and by broadening our international presence with additional interests in Canada, the Philippines and South Africa," Goldberg said.

"We plan to heavily cross market between our destination resorts. This will boost revenues and expand the markets where we operate.

"Furthermore, we expect this transaction to be accretive to earnings in the first year and, given our track record in integrating casino operations, we should achieve significant synergies leading to additional profits," Goldberg said.

"We also pick-up strategically located, undeveloped land parcels in Atlantic City and Las Vegas that can be used for future development," he said.

Starwood's gaming assets include Caesars Palace, Caesars Atlantic City, Caesars Tahoe, the Glory of Rome riverboat in Harrison County, Ind., the Sheraton Casino & Hotel in Tunica, Miss., management of the slot operations at Dover Downs Racetrack in Delaware, and various other joint venture, real estate and management contract interests or licenses for gaming properties in Halifax and Sydney, Nova Scotia; Windsor, Ontario; Manila, Philippines; and Gauteng Province of South Africa.

"We will use the proceeds of the transaction to pay down debt, strengthen our balance sheet and significantly reduce our cost of financing," Starwood's Sternlicht said.

"With the sale of our gaming business, we will have sold approximately $6 billion of assets since February of 1998. This represents a significant portion of the total price we paid for ITT, and we continue to own ITT's crown jewels -- the Sheraton, St. Regis/Luxury Collection, CIGA and Four Points by Sheraton hotel brands."

Park Place already operates casinos in Nevada, New Jersey, and Mississippi -- the three largest gaming markets in the United States.

Upon completion of the transaction, Park Place will have interests in 28 gaming properties located throughout the United States and around the world with nearly 2 million square feet of gaming space and approximately 28,000 hotel rooms.

State gaming regulators will study the transaction to make certain it doesn't give Park Place too large a share of the Nevada market, Gaming Control Board Chairman Steve DuCharme said today.