Growth plans outlined

David Strow and Richard N. Velotta

Monday, Jan. 15, 2001 | 11:27 a.m.

The casino industry's growth plans remained the hot topic on Friday, the last day of the annual American Gaming Summit in Las Vegas.

Mandalay Resort Group, for example, indicated it is once again moving forward with plans to build a huge mall connecting its Luxor and Mandalay Bay resorts on the Las Vegas Strip.

But Mandalay is keeping tight-lipped for now on any details, including growing talk that world-famous British retailer Harrods is eyeing the mall as a possible site for its first U.S. location.

"You're going to have to wait a couple of months for the company's official announcement," said Glenn Schaeffer, Mandalay president and chief financial officer.

Schaeffer said the south end of the Strip, dominated by the company's Mandalay Bay, Luxor and Excalibur properties, is presently "under-retailed." He also said the location provides an excellent opportunity to appeal to both tourists and local residents because freeway exits off Interstate 15 lead right to the property.

In May 1999, Seattle-based Nordstrom Inc. announced it would anchor a 1.2 million-square-foot mall at Mandalay Bay with a three-story, 225,000-square-foot store.

The company signed a deal with Westcor, a Phoenix-based shopping center developer with which it had worked before. The store was to be opened in 2001 and was believed to be the first retail development in the country to link two casino resorts with a department store.

"Our vision for Mandalay Bay and Luxor has always included an upscale retail bridge," Schaeffer said at the time.

But a year ago, there were signs that the deal had collapsed. Retail experts speculated that there were disagreements between Mandalay and Westcor over leasing fees. Mandalay said its own construction subsidiary, Mandalay Development Corp., would act as the general contractor and a new leasing agent would be sought.

In April, Mandalay was in negotiations with General Growth Properties to lease mall space.

Nordstrom ended the suspense in May, announcing during the International Council of Shopping Centers convention that the company had signed on with the Fashion Show mall.

Since then, Mandalay has been quiet about its mall plans, but in October a company spokesman confirmed that it was in preliminary talks with Harrods, the London-based mega-retailer owned by Mohamed Al Fayed, about building its first U.S. store in Las Vegas.

Schaeffer made no mention of Nordstom, Harrods or any other retailer at Friday's presentation. But he did emphasize Mandalay's successes, especially at the company's new flagship property.

"Mandalay Bay owns the brand for hip and cool on the Las Vegas Strip," Schaeffer declared. "All 49-year-olds like to verify their standing as hip and cool. And the good news for us is that we're not going to run out of 49-year-olds anytime in the next 15 years."

The one cloud in Mandalay's sunny forecast was fourth-quarter earnings at the company's Tunica, Miss., property, the Gold Strike casino. Bad weather closed highways around Tunica, cutting into revenues.

Industry analysts concur with Schaeffer that Mandalay is one of the leaders in cash flow. Schaeffer said Friday that the company has about $300 million in free cash flow annually from all its properties.

While there's nothing major on the drawing board for the company in 2001 except the mall, Schaeffer noted the company still has undeveloped land on the south end of the Strip -- the company's so-called "masterplan mile."

Schaeffer said the company is optimistic about 2001, even as the nation's economy cools. He said that when California went through rough economic times in 1992 and 1993, his company had record years.

"We had a solid, strong New Year's, but it's too soon" to project how the rest of the year will go, Schaeffer said. "We are positioned and have the ability to raise our room rates faster than the visitor growth rate. That means every dollar we add to the cost of the room goes to the bottom line."

Park Place

For Thomas Gallagher, the summit marked his first public speech since taking over as Park Place Entertainment Corp.'s chief executive. Gallagher, former general counsel of Hilton Hotels Corp., took over when CEO Arthur Goldberg died in October.

Gallagher made it clear he intends to continue the path of aggressive growth set by Goldberg, who led Park Place through the acquisitions of Grand Casinos and Caesars World Inc.

Gallagher relayed the story of his wife wanting to play slots at the Paris Las Vegas hotel-casino after the two arrived in Las Vegas in October. Gallagher warned her that she couldn't play at a Park Place property because of Nevada gaming regulations.

"She said, 'I can't play anywhere in Las Vegas -- you bought all the casinos,"' Gallagher said. "I said, 'Not yet, but we're working on it.'

"We will continue to be aggressive in seeking out new growth opportunities. I didn't come to Park Place to be a caretaker."

Gallagher acknowledged that gaming's merger spree of the past several years meant that "all of the major, obvious consolidations have already been done." However, he said Park Place will continue to examine possible targets.

"We can afford to be opportunistic, especially if the economy softens," Gallagher said.

One subject of speculation for Park Place has been the Aladdin, the neighbor of Paris Las Vegas on the Strip. It has been speculated Park Place would use its one-third position in the Aladdin's bonds to launch a takeover of the property -- particularly as the Aladdin struggles through its opening months, and minority owner London Clubs International examines selling off part of its stake in the property.

Gallagher acknowledged Park Place is more than just a casual observer at the Aladdin, but said no talks had been held with LCI about acquiring an equity stake in the property.

"It's all speculation on what we might or might not do there," Gallagher said.

Gallagher also said Park Place will "continue to deploy significant amounts of capital in Las Vegas," particularly at Caesars Palace. Park Place has 15 acres of land for future development at Caesars, and several acres at Bally's Las Vegas, now occupied by a "people mover."

"We have very aggressive but disciplined plans for that property (Caesars Palace), and we're confident we'll restore that property to its rightful place in the Las Vegas market," Gallagher said. "(At Bally's), don't be surprised to see us do something with that land in the next few years."

Gallagher also defended the fundamentals of Park Place, in light of shaken investor confidence in the wake of the company's warning that it would miss fourth-quarter earnings estimates.

"There was nothing in that quarter that indicated any fundamental problems with our properties or the gaming industry," Gallagher said. "A huge chunk of that was (poor) weather, an extraordinary issue."

Confidence will be restored "with your deeds, rather than your words," Gallagher said.

"We have to restore a little credibility in the market, but I'm confident we'll be able to do that," he said.

Gallagher also emphasized that political credibility is critical for gaming, especially as it expands into new jurisdictions. He appealed to his colleagues in the gaming industry to "makes sure our involvement in the political process is both legal and ethical," arguing that no new jurisdiction was worth jeopardizing the industry's image.

"If just one company forgets this, we will all suffer," Gallagher said.

The message has historical implications for Park Place. In the past decade, Park Place predecessor companies twice ran into regulatory difficulties over what regulators called questionable payments to political figures.

One incident came in 1994, when Bally Entertainment Corp. made $240,000 in payments to Bo Johnson, the speaker of the Florida House, while that state was considering legalizing gaming. The payments triggered an investigation by New Jersey gaming officials in 1999. Goldberg said during the investigation that Johnson was hired to identify new sites for possible casinos, and also to give Bally clout with local officials when it sought out approvals.

New Jersey did not fine or discipline Park Place, though it called Goldberg's decisions in the matter "distressing."

And in 1993, Hilton awarded $250,000 in grants to KC Perspectives, a company operated by a woman in a romantic relationship with Kansas City Port Authority Chairman Elbert Anderson. The grant came shortly after Hilton beat out several competitors before the port authority for the right to build the Flamingo Hilton riverboat in downtown Kansas City.

The payments triggered a federal investigation, and a federal prosecutor later said he was confident that a successful criminal prosecution would have resulted in Hilton being stripped of its gaming licenses across the United States. But Hilton staved off a criminal trial by paying $655,000 in a settlement, then agreeing to sell its Kansas City casino.

Gallagher, however, said his statements weren't prompted by any specific incidents in the past.

"As you look back at the history of gaming, particularly during the expansion of the last decade, there were things that happened that shouldn't have happened," Gallagher said. "It's important for me to say the rules are straight forward for us -- stay in the middle of the fairway."

Station Casinos

Joining in the talk of future growth Friday was Station Casinos Inc., which is closing in on approval of its third acquisition in just five months.

The acquisitions of the Santa Fe, Fiesta and Reserve in recent months will make 2001 a year of transition for Station, as it seeks to integrate the new properties into its portfolio, Chief Financial Officer Glenn Christenson said.

However, he added, "we continue to think there are opportunities for acquisitions in this (the Las Vegas) market."

One acquisition of 2000, the Fiesta, gave Station a brand it said it will use in its future expansion. On Friday, Christenson said "it's definitely a possibility" that Station will rebrand the Reserve under the Fiesta name when it acquires the Henderson property later this month, but said no final decisions had been made. Station has said it's not interested in branding the Reserve under the Station name, as it would create confusion with nearby Sunset Station.

Christenson noted that Station was an entirely different type of investment than Strip operators, relying heavily on frequent visits from local Las Vegas-area gamblers. Station's customers average seven to eight visits a month to the company's properties, Christenson said, compared to "once every two years" for customers of Strip properties.

"Over 53 percent of the population of Las Vegas lives within three miles of a Station property," Christenson said. "We have the most sophisticated gaming customer in the gaming industry in our locals market here."

Christenson pointed out that Station has 600 acres of gaming entitled land in the Las Vegas Valley for future expansion, with a value in excess of $100 million.

"There are fewer and fewer excellent sites for future development, and we control the majority of them," Christenson said. "We think it will be virtually impossible for anyone to duplicate our strategy in the local market in Las Vegas."

Though Station will remain focused on development opportunities in Las Vegas, Christenson noted that the company was optimistic it would win approval from the Bureau of Indian Affairs for its plans to operate a casino in partnership with the United Auburn Indian Community northeast of Sacramento.

"A casino there the size of Palace Station, with 2,000 machines ... in that market is a slam dunk," Christenson said.

Assuming the BIA approves the contract, Christenson said it's likely a temporary casino would begin operating there in early 2002.

Harrah's Entertainment

While Station sang the praises of concentration in one market, Harrah's Entertainment Inc. promoted its wide geographic diversity across the United States.

Harrah's focuses on a similar customer to Station -- the "avid experience customer," which accounts for 12 percent of casino customers but more than 50 percent of revenues, said Harrah's Treasurer Charles Atwood. But Harrah's promotes cross-market play and geographic diversity, with 21 casinos in 17 locations.

"I think what's important is that 50 percent of the U.S. population lives within three hours of a Harrah's casino," Atwood said. "People who like to play in casinos like to play in more than one market."

Atwood told investors that Harrah's now has 19 million names in its database -- and is focused on driving revenues from that database through such programs as "Total Rewards," the company's slot club program.

"Loyalty is something that is rare in the casino business," Atwood said. "We try to make defection painful. No one else can give you what we can give you."

As a result, Harrah's captures about 36 percent of its customers' gambling budgets, Atwood said.

While other gaming operators focus on maximizing hotel room revenues, Atwood said Harrah's is committed instead to filling its rooms with customers from the Total Rewards program. Harrah's Atlantic City is one of the most successful at doing this, filling 97 percent of its room nights with "rated" customers; properties that present opportunities for growth in this area include the Rio, where just 29 percent of room nights come from rated customers.

"While it may be nice to get another $5 out of the room, $5 is less important than getting someone in there who will play $271 in the casino," Atwood said.

As competitors seek to duplicate the Total Rewards program, Atwood warned that the economic hurdles for newcomers will be high.

"We spent $100 million to create this and install it," Atwood said. "We spend $10 million to $15 million a year on enhancements. It's not a project you should take lightly."

Horseshoe Gaming

Meanwhile, Horseshoe Gaming officials indicated that they're planning to stay and fight a license denial in Illinois, rather than sell their highly profitable Joliet riverboat casino.

Last June, the Illinois Gaming Board found Horseshoe owner Jack Binion unsuitable to hold a license, criticizing his business practices and operational controls, as well as his relationship with high rollers at Binion's Horseshoe Club in downtown Las Vegas.

"The day after (the ruling), Jack and his folks had all kinds of calls (interested in the Joliet boat) said Roger Wagner, senior vice president and chief operating officer of Horseshoe. "There was interest from major companies, as well as mid-cap (company) interest."

Some of those calls came from major Las Vegas operators, Wagner said. One person that looked at the boats, Wagner confirmed, was Desert Inn owner Steve Wynn.

"Steve Wynn looked at it as a favor to Jack to see what he thought of it," Wagner said. "But I'm not sure riverboats are his bailiwick. But he could make a hell of a lot of money with it."

Wagner estimated the Joliet boat, located in the lucrative Chicago market, will produce $243.3 million in revenues and $76.8 million in cash flow in 2001.

"We're in a real good position to sell the property," Wagner said. "We could sell it tomorrow at a real nice profit."

In September, Binion said he had preliminary talks with Park Place about selling all of Horseshoe Gaming to the Las Vegas gaming giant.

But on Friday, Wagner said a sale, at least of the Joliet riverboat, is unlikely in the near future, at least while Binion appeals the Illinois decision. That's because Horseshoe is interested in expanding to other jurisdictions, and doesn't want the Illinois license denial to hurt its prospects in other gaming jurisdictions. Selling the boat while that appeal is pending could hurt Horseshoe's license appeal, Wagner said.

Wagner said Horseshoe is suspending all capital expenditures at Joliet, save capital maintenance spending, while the issue is resolved. However, he said Horseshoe has purchased options to purchase two barges that could be used to expand the Joliet casino, and is working on a master plan for a possible expansion of the riverboat in the future.

"The appeal could take as long as three years to decide, but we'd like to get it resolved sooner than that without getting a black eye," he said.

Donald Trump

One operator that didn't show up at the summit was New York casino mogul Donald Trump, who was tentatively scheduled to make a presentation Thursday about Trump Hotels & Casino Resorts.

But Trump declined to attend, said Bear Stearns gaming analyst Jason Ader. Bear Stearns was one of the sponsors of the two-day gaming summit.

"(Trump) sees his company as a hidden gem," Ader said. "He said if he talked about it, people would realize (its value), and he wants to buy the shares."

Ader said Trump told him he'd personally purchased 50,000 shares of Trump Hotels stock recently.

"He says if no one wants to give him fair value for it, he'll buy it himself," Ader said.

But Ader didn't share the rosy outlook on Trump Hotels' stock.

"It produces a lot of cash flow," Ader said. "But it's such a highly leveraged company that it makes public equity markets nervous. It would have a lot more value as a private entity."

Ameristar Casinos Inc. of Las Vegas was also scheduled to make a presentation Friday, but had to withdraw because of a Securities and Exchange Commission-mandated "quiet period" related to a recent bond offering.

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