Gallagher promotes Caesars’ expansion

David Strow

Monday, May 14, 2001 | 10:37 a.m.

In his first shareholders meeting as chief executive of Park Place Entertainment Corp., Tom Gallagher on Friday pitched an ambitious, $500 million-plus expansion of Caesars Palace at his company's stockholders.

Park Place has previously announced the two main components of the expansion project, a 4,000-seat "Colosseum" entertainment venue and a 35-story room tower, the resort's fifth. But Friday marked the first time Park Place openly discussed a pricetag, timeframe and details of the project.

Gallagher said the $65-75 million Colosseum will be completed in 2003. It will be followed in 2004 by the new tower, which will have at least 900 suites and cost $450-475 million.

Such an expansion would give Caesars at least 3,354 rooms, making it the city's sixth-largest hotel, slightly ahead of Mandalay Bay.

"What we're really trying to do is put it back on top, by building exactly what (Caesars Palace) needs," Gallagher said. "We're not going to throw away money. This is the kind of stuff that will attract visitors from across the country and the world."

Gallagher said Park Place is targeting a return of at least 15 percent on its investment. At the minimum project price of $515 million, that translates into projected new cash flow of $77 million per year -- a 65 percent increase over the property's 2000 cash flow levels.

That's ambitious growth, but Gallagher believes it's achievable, given the power of the Caesars name and its location at Flamingo Road and the Strip. Moreover, it will push Caesars Palace directly onto the Strip -- currently, visitors must take a long moving walkway from Las Vegas Boulevard to enter Caesars Palace.

"There are lots of places you could build a new hotel tower that wouldn't generate that kind of return," Gallagher said. "It's not just another hotel tower somewhere in Las Vegas."

In addition to the new rooms and the Colosseum, Park Place will add 50,000 square feet of new retail space, 70,000 square feet of meeting space, a spa and several new restaurants.

The Caesars Palace expansion was the highlight of Gallagher's presentation to Park Place shareholders. Gallagher took over Park Place shortly after respected Chief Executive Arthur Goldberg, who tightly controlled the Las Vegas casino company, died last October.

It hasn't been a smooth ride since then for the former general counsel of Hilton Hotels Corp. Earnings have declined during each of the two quarters Gallagher's been with the company, including a net loss of $7 million for the fourth quarter of 2000.

But Gallagher urged shareholders to look at the potential of Park Place, the gaming industry's largest company, spun off from Hilton a little over two years ago.

"(Park Place) is a young, vibrant, growing company, with a great portfolio of assets, terrific brands and extraordinary financial strength and flexibility," Gallagher said. "This is a very competitive industry, but I can tell you we've got everything we need to continue to lead this industry."

Gallagher also expressed some frustration over Park Place's stock performance, long a sore spot with company officials. Park Place closed at $11.91 Friday, a 23 percent discount over the 52-week high it reached last fall.

"Having watched the dot com bubble and all of the other craziness that passes for market intelligence, I won't presume to predict how the market will value us ... but I can tell you if it keeps valuing us as it does now, we're going to continue to be aggressively buying ourselves back (through stock repurchases)," Gallagher said. "I can say that one week after I became chief executive officer of Park Place, I made a significant personal investment in our shares. I believed it was a great investment then and I still do."

Park Place indicated in its proxy that Gallagher owned more than 185,000 shares of stock as of March 16.

Gallagher compared his company to Los Angeles Lakers superstar Shaquille O'Neal, who showed great promise but also some struggles during his first two years in the NBA.

"Look at him now that he has learned to use his size and his strength with both intensity and humor," Gallagher said. "It's not a bad analogy for our own potential as a young company."

Gallagher said the company will focus on a disciplined investment strategy of expanding existing properties, making selective acquisitions, paying down debt and repurchasing stock. Only investments that can return at least 15 percent a year will be considered, Gallagher said.

"Being the biggest company in the business doesn't mean much unless we're also the best and most profitable," Gallagher said.

One shareholder was curious to know if that could include the Aladdin, located just north of Park Place's Paris Las Vegas on the Strip. Park Place owns a one-third position in the Aladdin's bonds, and it has often been speculated the company would attempt a takeover if the Aladdin's financial struggles cause it to slip into bankruptcy.

Gallagher, like Goldberg before him, gave a wait-and-see response.

"We're obviously watching that very closely ... but the truth is, we'll let that play itself out," Gallagher said. "If it doesn't do well, we'll have an opportunity to take a look at what opportunities exist there. If it doesn't fit the kind of returns we need ... we'll take a pass."

Gallagher then said the Aladdin faced "issues" with its layout, design and access to the Strip.

"It would take a lot of money to deal with," Gallagher said.

But Gallagher was quick to shoot down any speculation that the company would attempt to sell off the Las Vegas Hilton after a deal to sell the property to Los Angeles developer Ed Roski Jr. fell apart in January.

"The Hilton is not for sale. We've been to that movie," Gallagher said, drawing applause from stockholders. "It's very well positioned right next to the (Las Vegas) convention center. When the convention center (expansion) opens, it'll do even better.

"We're very happy to have it, it's generating great results, and it's not for sale."

After the meeting, Gallagher said Park Place "needs to elevate its game" at the Las Vegas Hilton, but will do so by renovating the property, rather than adding new rooms. About $30 million will be spent on room renovations over the next several years, Gallagher said.

Gallagher said Park Place will focus the property squarely on the convention business, rather than trying to make it a player in the high-end business again. A vivid example of this new focus lies with the high-end villas at the Hilton -- once used to entice high-rollers, the villas are now being booked to conventioneers, Gallagher said.

"We're not going to chase the high-end (business) at the Las Vegas Hilton," Gallagher said.

Another area some gaming companies -- particularly MGM MIRAGE -- have examined closely for its potential returns is Internet gambling. The Nevada Legislature is considering a bill that would give the Nevada Gaming Commission the authority to legalize Internet-based casinos in the state of Nevada.

Gallagher said Park Place wants to position itself to be a leader in Internet gambling if it is made legal -- and hinted the Caesars brand would be a big part of such an initiative. But Gallagher also expressed strong reservations about unresolved legal issues, and said he believed it would be "quite awhile" before those issues were resolved.

One such issue is whether Internet gambling is even legal under U.S. law. But Gallagher expressed the most concern about the potential of children playing in Internet casinos.

"We as an industry have spent a great amount of time and money trying to keep kids out of our casinos ... we shouldn't be in a rush to bring casinos into our homes and do the very things we've tried to prevent at our properties," Gallagher said. "I'm a grandfather, and I wouldn't want my grandchildren (having access to) Internet gambling."