Tuesday, August 23, 2005
Copyright © Las Vegas Review-Journal

IMPERIAL PALACE SOLD: Harrah's keeps buying

$370 million purchase gives gaming giant six major resorts at Strip's center

CORRECTION -- 08/24/05 -- A Page One story in Tuesday's Review-Journal contained an error. With the purchase of the Imperial Palace, Harrah's Entertainment will control 275.5 acres in Las Vegas, predominantly along the east side of Las Vegas Boulevard between The Venetian and Aladdin.

Harrah's purchase of the Imperial Palace means the only site missing from its center Strip portfolio is the Barbary Coast. Photo by Craig L. Moran. Click image for enlargement. Graphic by Mike Johnson.

Harrah's Entertainment Monday announced the purchase of the Imperial Palace for $370 million, a strategic land purchase that gives the gaming giant six major resorts at the center of the Strip and room to grow.

Located between Harrah's Las Vegas and the Flamingo on the east side of the Strip and across the street from Caesars Palace, the 2,640-room Imperial Palace sits on 18.5 acres and offers the casino operator a multitude of development opportunities.

"With those properties in contiguous proximity, this purchase gives Harrah's numerous possibilities to do what it wants at the heart of the Strip," said Susquehanna Group gaming analyst Eric Hausler.

The purchase of the Imperial Palace -- broken down in simplistic terms at $20 million an acre -- made sense for Harrah's, several analysts said. The site was too valuable to Harrah's future plans to risk the aging property being bought by another casino operator.

"This was, effectively, a vacant land purchase," said Brian Gordon, a principal with Applied Analysis, a Las Vegas-based financial consulting firm. "This deal confirms the value of Strip frontage property."

Hausler said it was unknown if the purchase price equates to the Imperial Palace's cash flow value because, as a privately held casino, it doesn't have to make its financial performance public.

"In the end, it really doesn't matter because the value of this transaction is in the land," Hausler said. "Harrah's has long desired to have that site, and it gives the company a tremendous parcel to develop."

UBS Investment gaming analyst Robin Farley estimated the purchase price to be 10 times the Imperial Palace's cash flow.

"(The transaction) is still somewhat expensive given that not all of the acreage is Strip frontage," she said.

Harrah's has been in a Strip land acquisition mode since last year. A $9 billion buyout of Caesars Entertainment that was completed in June gave the company the Flamingo, Caesars Palace, Bally's and Paris. Harrah's recently purchased the small off-Strip Bourbon Street across from Bally's and several adjacent land parcels along Audrie Street behind the Flamingo, all for future development.

With the purchase, Harrah's will control 275.5 million acres of developed and undeveloped land in Las Vegas, predominately near the center of the Strip between The Venetian and the Aladdin.

The only site missing from Harrah's center Strip portfolio is the Barbary Coast, which sits on 4.4 acres at the corner of the Strip and Flamingo Road and is owned by Boyd Gaming Corp. A spokesman for Boyd Gaming said Monday that the company is not in negotiations with Harrah's over a possible purchase of the Barbary Coast site.

In a note to investors, Bear Stearns gaming analyst Joe Greff said Harrah's will probably demolish the existing Imperial Palace.

"There are no plans for substantial operational changes in the near term once ownership has transferred," Greff said. "However, we think in the medium term, it makes sense to completely redevelop, demolish or implode this ... property. In fact, we would not be surprised to see this site be part of a major redevelopment for Harrah's Las Vegas and the Flamingo. Stay tuned."

The deal must still be approved by Nevada gaming regulators, and Harrah's officials said they hope to close the purchase by the end of the year. A company spokesman said Harrah's intends to operate the Imperial Palace, which has a 52,000-square-foot casino, while it explores master-planning its Las Vegas growth strategy.

"This acquisition enhances Harrah's position in Las Vegas, enabling us to offer our customers the most inspiring array of entertainment and gaming options available in the heart of the Las Vegas Strip," Harrah's Chairman and Chief Executive Officer Gary Loveman said in a statement.

The transaction was announced after the close of stock trading on Monday, so shares in Harrah's were unaffected by the transaction. Harrah's ended the day at $71.83, up 23 cents or 0.32 percent.

Built by the late Ralph Engelstad, a North Dakota-born contractor, the Imperial Palace started out as the Flamingo Capri, a small Strip motel. During the 1970s and 1980s, Engelstad transformed the property into the Imperial Palace, known for an Asian-South Pacific theme, low-priced rooms, an expansive classic automobile collection and a long-running celebrity impersonator show.

"Their audience is really a bargain-seeking, value-oriented customer, probably a notch below the Harrah's customer," said Anthony Curtis, publisher of the Las Vegas Advisor. "It has a built-in customer base because they are loyal and return frequently. The customers like the location on the Strip and cheap rooms, and they have money to spend."

The Imperial Palace gained some infamy in 1989 when Engelstad was fined $1.5 million by the Nevada Gaming Commission for actions that damaged the reputation and image of the state's gaming industry.

In 1986 and 1988, Engelstad hosted parties at the Imperial Palace that celebrated the April 20 birthday of Nazi leader Adolf Hitler. State authorities claimed Engelstad amassed a multimillion-dollar collection of Nazi-era war memorabilia, including artifacts, propaganda, posters and weapons that were kept at the property in the auto collection away from the public.

Engelstad died of cancer in November 2002. His wife of 48 years, Betty, continued operating the hotel through the Ralph Engelstad and Betty Engelstad Trust, along with his longtime attorney, Owen Nitz, and accountant, Jeff Cooper.

The trust will continue to operate the Imperial Palace until the transaction closes. The resort employs 2,500 workers, and a property spokesman directed questions about the transaction to Harrah's officials. Nitz did not return phone calls.

"In memory of Ralph, we would like to convey our thanks to all the Imperial Palace employees for the wonderful years you gave to the Imperial Palace," said Betty Engelstad in a statement released by Harrah's. "We look forward to continuing working together in the ordinary course of business until we get ready to make this transaction."

Harrah's spokesman David Strow said the auto collection, which is owned by a third party, is not part of the transaction. The business leases space in the Imperial Palace to display the collection, and Strow expects that to continue.

The purchase agreement also does not include the Imperial Palace Mississippi in Biloxi.

In its statement, Harrah's said the company would not assume any debt with the purchase.