gaming:

Gauging casino buyouts’ role in misfortune

Taking companies private ballooned debt, led to layoffs, but the moves have defenders

Published Thursday, July 9, 2009 | 2 a.m.

Updated Thursday, July 9, 2009 | 9:29 a.m.

Attorney suing Harrah's loses law license; case dismissed (6-29-2009)
Station still in talks on debt restructuring (6-22-2009)
Harrah's thinks it can gain from online gambling (6-22-2009)
State gaming regulators shied away from policing borrowing (6-21-2009)
Amid cost cuts, executives' pay raises hackles (6-15-2009)
Harrah's execs cashed huge checks (6-8-2009)
Station expects extension in talks with creditors (5-29-2009)
Harrah's to issue $1 billion in debt in private offering (5-27-2009)

Headlines from the Vegas gaming industry

Private equity firms made offers to acquire Harrah’s Entertainment and Station Casinos in 2006 and early 2007, when capital was cheap and business was booming.

Their strategy was to boost the companies’ value through job cuts and other cost reductions and take the companies public again after a few years at a large profit. The firms and their corporate targets touted it as a path to long-term profitability: Freed from Wall Street’s quarterly profit treadmill, private companies can make decisions that sacrifice short-term profits but improve the company over the long haul.

Yet what’s good for investors isn’t always good for employees or the state, which is charged with fostering the gaming industry’s long-term growth and health.

To critics, such deals, called leveraged buyouts, or LBOs, are the high-finance equivalent of flipping real estate — a shell game that succeeds more through questionable cost-cutting and layoffs than improved corporate management.

The deals didn’t turn out as their architects had planned, because of the recession. Like over-mortgaged homeowners, the LBO targets, suddenly unable to pay down monster debts, became sitting ducks in the recession.

Station has asked bondholders to forgive millions in debt as part of an expedited bankruptcy proceeding. Though Harrah’s hasn’t missed any debt payments, it is asking bondholders to forgive debts as an alternative to filing for bankruptcy protection.

Although no exact figures are available, thousands of layoffs followed the Station and Harrah’s buyouts. But there’s disagreement over how many of those cuts were LBO-related and would have occurred regardless of the slump.

“Part of the game with these LBOs is that there were going to be bodies cut,” said Joe Fath, a portfolio manager at T. Rowe Price Associates. (Like many investment firms, T. Rowe benefited from high prices private equity firms paid shareholders to take companies private.)

Fath, who questions the effectiveness of the deals, said he thinks cost-saving measures taken by Harrah’s and Station were influenced by the LBO debt and not the recession alone.

Others note that gaming companies that weren’t taken private, such as MGM Mirage and Las Vegas Sands, have slashed costs in a manner similar to Harrah’s and Station.

About 14,000 fewer people were employed in gaming hotels in the Las Vegas Valley in May versus a year ago, according to state figures. The Culinary Union, which represents more than 50,000 casino workers on the Strip, has estimated that more than 5,000 people have either lost jobs or work reduced hours.

“Like most other private and public companies coping with the worst economic downturn the country has faced in decades, we’re doing what’s necessary to get through the current turmoil,” Harrah’s spokesman Gary Thompson said.

Executives with Station Casinos, citing the company’s negotiations with bondholders and pending bankruptcy proceeding, declined to comment for this story.

•••

The argument that private equity firms better manage companies won over regulators, but it didn’t appear to apply to Harrah’s or Station, which were viewed as competently run companies before their LBOs. The companies weren’t especially bloated and the same casino executives continued to manage them after the buyouts.

“Did these companies come in and make Harrah’s and Station better companies? Not really,” Fath said. “In the case of Harrah’s, they have made things worse.”

But Thompson said Harrah’s has benefited from its private equity owners’ “global expertise and contacts” in the travel, leisure and entertainment industries. The debate over whether leveraged buyouts strengthen or weaken companies has raged for decades, usually pitting labor unions against corporate interests.

Before the recession, LBOs were lucrative for both the shareholders who were bought out by private equity firms and the private equity investors who took them public again. To succeed, such deals require cheap capital and a booming economy — interest on the loans must be greatly offset by the company’s ability to pay down the debt.

Harrah’s buyout nearly doubled the company’s debt, to more than $24 billion. Station increased its debt by more than 50 percent, to $5.7 billion.

Those debts were considered manageable when the economy, especially in Vegas, was flush.

The Private Equity Council, a trade group that represents LBO firms in Washington, D.C., cites studies showing that firms taken private have saved jobs, spurred employment and development while improving earnings performance.

Critics say that although some companies may be managed more efficiently under private management, others benefit merely from broader economic growth. These deals, they say, are nothing more than the product of upward business cycles.

The Government Accountability Office — in response to the little-regulated LBO boom and bust — released a report in September on private-equity-financed LBOs. The GAO, which cited evidence on both sides of the debate without drawing many definitive conclusions, said it’s difficult to determine whether other factors unrelated to the LBOs improved performance. Likewise, factors beyond the deals themselves might explain the “lower employment growth” associated with some LBOs, the report said.

•••

LBO investors, who tend to own companies for three, five or even 10 years before selling them, have a longer-term outlook than many Wall Street investors. And yet, if their cost-saving strategy translates into less investment in resorts and other attractions, that makes their interests shorter-term than those of the state, which depends on casino industry growth spanning generations.

Station’s reasons for going private weren’t focused on cost cuts, according to an industry source familiar with the deals. The company wanted to be free to build attractions that might threaten profit in the short term, he said.

Harrah’s decision not to redevelop its older west-facing Strip properties after going private was driven not by penny-pinching private equity firms but the realization that the return — with so much competition in the works — wouldn’t justify the investment, said Thompson, the company spokesman.

“In light of what’s happened with the economy and its impact in Las Vegas, I believe that was a prudent decision,” he said.

Unlike Station, Harrah’s was in cost-cutting mode at the time of the buyout offer. Harrah’s began corporate-level layoffs in August 2006, Thompson said.

Harrah’s has reduced staff to match business conditions, he said. “That said, we’ve built our business by focusing on customer service, and that remains our focus today.”

The industry source said cutting labor costs makes sense for many LBOs but cautioned against it for labor-intensive casino companies.

Though lost business forced some cuts, “you can’t cut your way to prosperity in a customer-service-oriented business,” he said. “You have to grow your cash flow ... and you can’t do that if you don’t have enough bodies in your building.”

Were the cuts more drastic for Station and Harrah’s compared with their publicly traded peers? Would the companies have cut fewer employees had they not gone private?

With the depressed economy to blame for their balance sheets, it remains to be seen whether LBOs are bad for the gaming industry, said Bill Lerner, a principal with Union Gaming Group in Las Vegas.

“We’d know the answer to that question” if not for the economic turmoil, he said.

Discussion: 15 comments so far…

By formervegas76

7/9/09 at 3:34 a.m.

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"we're doing what's necessary to get thru current turmoil" thompson said. oh why do i doubt the massive layoffs have hit the execs very hard. these are 2 companies run by very incompetent people. rio was one of the best places in town till harrah's bought them. stations, what can i say, used to be my favorite place to stay and play, really feel sorry for the workers who come in day after day and work hard while they are let down by the company.
By rayy

7/9/09 at 4:57 a.m.

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The only persons that benefited from this LBO are the grandiosely-enriched former executive officers.
By greenphantom

7/9/09 at 5:30 a.m.

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Harrahs has cut so much that customer service is non existent. They continue to spiral downward with no end in sight. Management does not listen to their customers or their employees. You cannot cut massive numbers of employees and continue customer service. Gary Loveman and his cronies have lined their pockets at the expense of customers and employees.
By muddapucker

7/9/09 at 5:49 a.m.

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It would be one thing if the LBO geniuses and corporate whiz kids just took down themselves and lost their own billions, but the fact is they gambled with other people's money.

I used the word gambled on purpose because that's what it was.

The problem is they took down thousands of employees with them. Not to mention cutting service and reducing slot and blackjack payouts.

They have really made a mess of things. While I feel a limited amount of sympathy for investors, my heart goes out to all of the dealers, food and service workers and others on whose back the casinos were built.

They have done nothing but work for a company that let them and their families down, not to mention Las Vegas as a whole.

While the economy influenced it, I don't think that it caused it as much as exposed it. Its a shame what they have done to the Casino industry.

The leveraged buyouts were all based upon continued economic success. However, the companies were so highly leveraged that they could not stand any negative deviation in their cash flows.

I am not optimistic of the future of the gaming industry in the Las Vegas Valley. They have killed the goose that laid the golden egg.
By mrjb

7/9/09 at 9:24 a.m.

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Treating employees like slaves and children, hurts everyone. until this corporate mentality is changed, Harrah's will be a rotten place to work, play and stay!
By acesbet

7/9/09 at 10:29 a.m.

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Harrah's may be the worst place to work for a living but we dislike it for other reasons. When We receive Comp rooms at "Harrah's-Rincon" which is near San Diego. We now thow the comp's waste basket. We are "Diamond Card" holders but we are not going back. We were brought up differently.

1. They are guilty of "Segregaton" to the Nth degree. We are not segregationist.

2. If you are a Diamond player you park in a reserved area set aside for you.That is not "Segregation" I do not know what "Segregation" is.

3. If you want to eat in the Buffett or Resturant you get to go to the front of the line. Because you are a Diamond player. That is wrong and hurtful.

4. If you want a Booth to sit in you have to be a "Diamond Player". What no "Handicap Booths"?

5. If you want break large currency bills you have to be a "Diamond Player" to use the cashier . Otherwise you have to stand at the change machine displaying all your large bills to the person standing behind you. This also ticks him or her off for the long wait time.

When we go to Vegas now we stay the "Palazzo or Wynns. We junk the Comps from "Harrah's"

I feel they need a class action complaint against "Harrah's Rincon" and others who practice these kind of policies.
By Unk

7/9/09 at 10:55 a.m.

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I like the part about "Regulators approved", well ya the regs were their buddies, duh.

Truth is, this whole thing was nothing but a big scam to suck the $$$ out of yet another Company by a handful of slick crooks masquerading as Investment professionals.

Now that the target has been hollowed out to a shell and the little guy is getting hosed, they scam the Taxpayers.

Bernie "Madoff" has many students.
By dutchcocoa

7/9/09 at 11:09 a.m.

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Station Casinos are going down the wrong path. As a Chairman card holder, I could tell you they have pushed me out the door. A couple of wins on their video poker machines and you are no longer wanted. Literally all benefits of play have been taken away in an effort to discourage me from playing at their casinos. Apparently their business plans are wrong!!! I warn you, don't win there as all offers only go to losers!!
By Westerly8

7/9/09 at 1:25 p.m.

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Maybe the best thing that could happen would be if the bond holders finally stop giving them extensions on all this debt. If they would just foreclose and replace the management of these places, perhaps things would ultimately be better. At least it would force out those who initiated the mess.
By Rocco

7/9/09 at 1:46 p.m.

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acesbet.... thank you for pointing that out...I have been to Rincon and I was appualed at that practice..........that company will die soon no says anything good about Harrahs.....Bye I will be at the M
By kenodave

7/9/09 at 8:53 p.m.

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The employees at Stations may have been hurt by all the cutbacks, but thank goodness the Fertittas fared much better...

http://lansner.freedomblogging.com/2009/...

http://southcoasthomes.freedomblogging.c...
By GunslingerA10

7/10/09 at 4:14 a.m.

Suggest removal

How sad and sorrowful for the socialist group of consumers in the marketplace that there are levels of service in casinos, or on aircraft for that matter, for privileged capitalist. There should only be one brand or one product for all to buy or use, regardless of the consumers desire for quality or ability to afford superior service.

Soon there will be an out-cry for only one model automobile on the market too, well, that fulfillment is around the corner as GM and the rest of the country's manufactures reduce the number of models and products for consumption.

On the other hand, everyone waiting in line for a single product makes everyone equally deprived, the focus of which is not to improve on the status-quo, but rather, the numbing of the senses to eliminate the desire for superior service or quality products is what that mind-set speaks to.

There are casinos that offer privileges to customers who have demonstrated a higher level of play, as are many reward clubs in the free marketplace.

There are also casinos that are for the privileged few and there is no place in them for the locals or small part-time player to pull-up a chair. I suppose if you are just wandering about never looking to play then those casinos are fine to walk around in.

When the free market system is allowed to work the consumer wins, through both quality products and improved product availability. If you don't have the funs (funds) to play then stand in line and wait for your hand-out with the rest of them, but don't hamstring the players who have the wear-with-all to step-up their game and turn-it-up a notch.
By lightfoot

7/10/09 at 4:28 p.m.

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Nice article, Liz. I'm not sure who is profiting from all of the nonsense being allowed on the strip but I feel like the gaming commission and state legislature is watching over the lifeblood of Nevada just like the SEC watched over Bernie Madoff. It's truly obvious to customers what is going on and word is spreading like wildfire.
By spartacus84

7/11/09 at 2:54 a.m.

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These greedy capitalists are getting what they deserve. Too bad they had to ruin Las Vegas in the process.
By boboandelo

8/6/09 at 10:18 p.m.

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That's right, companies like those of Harrah's deserve exactly what they get. Hopefully, TPG and Apollo Management will see the light and replace Gary Loveman and his cronies with some seasoned executives with actual casino operating experience. Let's face it, the former university professor isn't cutting it and neither are the highly paid force of double MBA's he's put on the payroll, that he has surrounded himself with, that think they are just a little bit smarter or better than everybody else even though they have never worked in a casino before. Bottom line, you can fool yourself, but you can't fool your customers or your employees.
Harrah's is not the only game in town.

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