Emperor’s new clothes

When Harrah’s Entertainment acquired Caesars Palace 25 months ago, employees were worried about the direction the new owners might take the high-profile property, according to general manager John Unwin.

"We were really concerned Harrah’s was going to take us out of the high-end business," he said. "It took a year for the staff to really believe it would only be better."

Any lingering questions should have been answered Thursday with the announcement of a $1 billion Caesars Palace expansion intended to keep the 41-year old property competitive in the evolving high-end Strip market.

"Caesars is our premium offering in the market," said Gary Loveman, Harrah’s chairman and chief executive officer. "It would be the property of ours that would come under greatest (attack) from these new high-end properties."

The project includes a sixth hotel tower that will add 665 rooms, remodeling of the existing Forum Tower, adding a 263,000-square foot convention area, enlarging the front entrance and valet parking area, three new swimming pools and enlarging and modernizing the sports book.

The various projects will be finished in stages, with the Octavius Tower scheduled for completion in early 2009.

Unwin said 1,000 jobs will be added to the current staff of 7,500 and the number of rooms will increase to 4,013.

"We’re committed and confident this will strengthen the world’s greatest casino-resort brand," said Gary Selesner, Caesars Palace president. "It will allow this property to serve as a flagship for the growth of this company for years to come."

Selesner said another announcement about additional projects at Caesars could come within the next two months.

Harrah’s received approval from Clark County officials in January to expand the casino and add retail space on the southeast corner of the property, but Selesner was noncommittal.

The announcement comes while other major gaming companies are investing billions of dollars to build new high-end resorts on the Strip that will compete for Caesars Palace’s core customers.

Approximately 28,000 rooms are expected to be added along the Strip by the end of 2011, according to an investors note from Wachovia Capital Markets gaming analyst Brian McGill.

High-end projects under construction include MGM Mirage’s $7.4 billion CityCenter, Boyd Gaming Corp.’s $4.8 billion Echelon, Wynn Resorts Ltd.’s $2.1 billion Encore and Las Vegas Sands’ $1.8 billion Palazzo.

"We absolutely think we need to make Caesars as terrific as it can be in the face of this new competition," Loveman said.

The $375 million Octavius Tower will include 71 suites and three 10,000-square foot pool villas.

The announcement comes with Harrah’s Entertainment in the regulatory process of a $17.1 billion buyout by private equity firms Texas Pacific Group and Apollo Management.

Loveman said the project reaffirms what he has been saying since December, when the buyout was announced: That large capital investment projects will not stop under the new ownership.

"I think this project demonstrates there is a lot of misunderstandings about (leveraged buy-outs) and private equity deals," he said. "The deal is not about stopping growth or stopping activity. As this project demonstrates, we are going to continue to build the company and grow."

Loveman said the new ownership group had to approve the Caesars Palace investment and the $704 million Margaritaville Casino & Resort in Biloxi, Miss., announced May 15.

Harrah’s investment in Caesars is part of a larger plan to take the brand global when developing other high-end properties.

"In order to have a Caesars you have got to have all the range of services people would expect," said Loveman, mentioning plans to brand new projects in the Bahamas and Spain.

Harrah’s acquired the Caesars Palace as part of the $9.4 billion buyout of Caesars Entertainment in June 2005.

It quickly became the flagship property of the expanded gaming company and helped grow the customer rewards program, Total Rewards, to close to 40 million people.

Loveman said Harrah’s quickly learned just how valuable having Caesars in its portfolio was.

"The demand for the Caesars brand is much bigger and stronger than we could have anticipated," Loveman said. "Once we offered Caesars Palace (in Total Rewards) the demand was absolutely enormous."

The property’s operating revenue increased 63 percent in 2006, the first full year under Harrah’s and with the new 949-room Augustus Tower, according to Tom Jenkin, the company’s president of the western division.

While the $1 billion announcement is Harrah’s largest capital improvement investment in Las Vegas to date, the future of projects for the company’s extensive land holdings on the east side of the Strip still remain in flux.

South of Flamingo Road, Harrah’s owns 91 continuous acres, including Paris Las Vegas, Bally’s and undeveloped land along Koval Lane stretching to Harmon Avenue.

North of Flamingo, it owns 99 acres, including Bill’s, the Flamingo, Harrah’s and Imperial Palace.

Jenkin said the company is still master-planning the land and there is no schedule to announce any projects.

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