How to Survive in Vegas

(page 6 of 6)

During a recent visit to Harrah's, I sat with two members of the Total Rewards staff, Matthew Bowers and Andrea Mathews, as they pulled up the profiles of various players. Thirty-year-old "A" from Chicago, for example, is a female slot player who has made 36 trips to Harrah's Chicagoland casino in Illinois, playing an average of 47 minutes per trip and losing about $156 each time she plays. She is an active buffet customer, and Harrah's will entice her back soon with bigger and better buffet offers. Next, Bowers and Mathews pulled up my profile. I had spent exactly 8 hours and 34 minutes gambling. They had on my screen the games I played, the duration, and the value I represented. They knew, for example, that I had sat down to play Pai Gow Poker at 12:39 p.m. and gotten up from the table one hour and six minutes later. I had bought in for $800 and cashed out for $1,300. (That was among my better gambling sessions that trip.) They had tracked what I'd eaten, how much I'd spent, and where I'd shopped. Based on my age, gender, zip code, and gaming preferences, they had assigned me a theoretical value of $529, meaning that was how much they expected me to lose every time I came to a Harrah's property.

"You're a good player," said Bowers. "You'll be getting an attractive offer from us." Then he smiled at me. "Please, keep playing."

Which meant I was exactly the kind of sucker they were looking for.

An Asian Recovery?

Harrah's is likely to be around for many years, separating probablities from their money. Thanks to the debt restructuring Loveman engineered in 2009, less than 1 percent of Harrah's debt comes due in the next two years. By contrast, competitor MGM Resorts has 15 percent of its debt scheduled for repayment in that time, according to the company. On Aug. 4, Harrah's reported a $274 million quarterly loss; Loveman said he was "encouraged by the recovery" in Vegas. Returning to double-digit growth, however, requires Loveman to undo his big mistake—not acquiring a gaming concession in Macau. Of the three areas of potential gaming industry growth, Loveman has positioned Harrah's to succeed in two. If Internet poker is ever legalized, then his World Series of Poker is likely to be a dominant brand. And as casinos open up in more states across the U.S.—Ohio last year became the 25th state to legalize casino gambling, according to the National Conference of State Legislatures, and Massachusetts appears deadlocked over the details of a legalization bill—Harrah's, with $3 billion in cash and available credit, is poised to expand into these emerging markets. The third area—booming Asia, where Loveman missed a big chance—remains a challenge. "Gary did an incredible job getting the company through the liquidity crisis." says Frank J. Fahrenkopf Jr., president and CEO of the AGA. "Now he needs to figure out Asia."

Loveman's 2007 purchase of the 175-acre Orient Golf (Macau) Club, which Loveman has described as a "$600 million round of golf," was an attempt to make up for not bidding on a gaming concession a year earlier. Without a license—the Chinese government has allowed six and shows no inclination to increase the number—the land is valuable, but not as precious as it would be with a big, fat Caesars Palace sitting on it. Loveman, who is also chairman of the Harrah's board, and his private equity partners have been working steadily to change that, either by purchasing a share of a concession or lobbying the Chinese government. It was in part to fund whatever Asian expansion becomes possible that Harrah's, in June, swapped $710 million in debt held by John Paulson, who also owns stakes in MGM Resorts and Boyd Gaming (BYD), for 9.9 percent of the company, which puts Harrah's current value at $7.2 billion. As part of the deal, Paulson, Apollo, and TPG bought from Harrah's an additional $557 million in bonds.

Paulson will be allowed to register and sell his shares, though Harrah's and its private equity partners say they still control the timing of an IPO. (Paulson does not have a board seat.) Eventually, Harrah's will go public again, providing capital for its Asian expansion. "There are two scarce resources in Macau," Loveman says, "land and gaming licenses. If you wish to have a resort in Macau, you need to have access to those two things. We have one of them."

If Harrah's establishes itself in Asia, Loveman will have completed a remarkable career journey. First, he was a business school professor who saw his theories succeed in practice. Then, a crisis manager who learned a new skill set. And finally, an executive who bounced back from a serious error in strategy and found a way into his industry's most important market. Or not: That chapter hasn't been written, and a post-IPO Harrah's may or may not have Gary Loveman at the head of the company. Someone who analyzes the probabilities as carefully as Loveman has no doubt studied those odds.

He says he is prepared for any eventuality. When he left Harvard back in 1998, he recalls, he thought of it as a sabbatical anyway.

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