With $23 billion in debt, the most of any U.S. hotel or casino company, Caesars Entertainment Corp. (CZR:US) wanted to spruce up its stretch of the Las Vegas Strip without dropping a bundle or adding to a glut of rooms in the city.
So the owner of Caesars Palace and Planet Hollywood bet its tight expansion budget on a 550-foot Ferris wheel and “party district” right in the middle of the Strip, where 20 million people amble past its eight properties each year.
The High Roller, set to debut in 2014, and the surrounding Linq entertainment area that opens in stages starting in December, represent Las Vegas’ latest bid to reinvent itself for low-rolling tourists who have grown stingy at the blackjack tables. The $550 million project is transforming the neighborhood into a pedestrian friendly dining, gambling and shopping experience, anchored by an observation wheel that may outdraw the London Eye or Empire State Building, Caesars said.
“This is the new model in Las Vegas,” said Brent Pirosch, a gambling consultant for the commercial property broker Newmark Grubb Knight Frank and one-time Caesars adviser. “Ten or 20 years ago these projects would have been considered competition for the bread-and-butter gaming business.”
The High Roller, already visible on the Las Vegas skyline, is the world’s tallest observation wheel. It could carry 4 million riders a year, Las Vegas-based Caesars said in a Sept. 24 regulatory filing (CZR:US). That’s more than the city’s five busiest attractions combined, including the top of Stratosphere Casino, Madame Tussauds wax museum and the Eiffel Tower replica at the company’s own Paris Las Vegas hotel.
Caesars, will charge riders an average of $16.50 to $21.50 each, the company told investors in connection with a recent debt refinancing. For that sum, tourists will get a 30-minute round trip in a glassed-in pod, offering panoramic views of the city’s famous neon skyline and surrounding desert.
Burdened by debt from a 2008 buyout, Caesars has been refinancing loans and extending maturities while looking for ways to boost profit. The company is also trying to raise $1.18 billion through the sale of stock in a unit that will partly own its online gambling business. Its bonds have fallen on speculation creditors may be hurt in a debt restructuring.
The company’s $3.31 billion of second-lien, 10 percent notes (CZR:US) due 2018, which traded as high as 96.25 cents on the dollar in February 2011, dropped to a record-low 49.75 cents yesterday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The Linq project, which doesn’t risk a dime on more casinos or rooms, marks a contrast to where Las Vegas was headed a few years ago. In 2009, MGM Resorts (MGM:US) International opened the gaming Mecca’s last big resort with CityCenter, an $8.5 billion labyrinth of hotels, casinos, dining and shopping down the street. The goal then was to draw tourists in and keep them.
MGM Resorts, the biggest casino operator on the Strip, announced plans in April to build its own pedestrian-friendly entertainment district between its New York-New York and Monte Carlo casinos. The facades of both will be redone and the space converted to an outdoor plaza, and an arena for concerts and sports will be added at a total cost of $450 million. MGM has about $13 billion in debt (MGM:US).
“People no longer want to be chained to a slot stool or a theater seat,” Jim Murren, chairman and chief executive officer of MGM Resorts, said on Bloomberg Television’s “In the Loop With Betty Liu.” “They go in and out of environments and they like to be outside, they like to walk around. I think the Caesars project is going to be very successful.”
Caesars, controlled by TPG Capital and Apollo Global Management LLC (APO:US), and MGM are adjusting to a drop in gambling by Las Vegas tourists. The average guest spent $485 per trip at the slots and tables last year, down from $652 in 2006, according to the Las Vegas Convention & Visitors Authority. The amount spent on food, shopping and shows rose 1 percent to $457.
Eventually, Caesars will have a pedestrian-friendly environment along almost a mile long on the Strip, running from its Planet Hollywood to Harrah’s properties. Along the way, tourists will pass the company’s soon-to-be renamed and remodeled Bill’s Gambling Hall & Saloon, its Imperial Palace, now called The Quad, and the Linq, a 250,000-square-foot dining and shopping area with the Brooklyn Bowl bowling alley and concert venue, and the Tilted Kilt pub.
Both the Quad and Caesars’ Flamingo casinos will be open to the Linq plaza, said Rick Caruso, the Los Angeles shopping center developer who consulted on the project. The area was designed with fountains and trees to cool pedestrians in the desert heat. The mall, on the “50-yard-line” of Las Vegas, dispenses with the idea that casinos need to keep people inside.
“There’s a natural way people want to live their lives,” Caruso said. “They want to be out in the street, having a sense of being in a place that’s much more organic.”
The High Roller, with 150 employees, could take in $86 million in annual revenue and produce earnings of $60 million before interest, taxes, depreciation and amortization, according to Caesars.
The London Eye, a similar observation wheel in the U.K., draws 3.9 million riders at the equivalent of $32.25, while the Empire State Building in New York welcomes 3.5 million to its observation deck for $25 a piece, according to Caesars.
In a road show for a $4.92 billion mortgage and bond refinancing last month, Chairman and Chief Executive Officer Gary Loveman said Caesars originally planned to build a new casino hotel on the land now devoted to the High Roller and Linq. Hotels completed since the 2008 financial crisis have depressed room rates, he said.
“It’s since become clear what you don’t need is additional casino-hotel space,” Loveman said.
Loveman wasn’t available for comment, according to a company spokesman.
About 84 percent of Las Vegas’s visitors are returning customers, according to the visitor authority, suggesting Caesars’ High Roller ride will have to count on repeat fans after the initial excitement wears off.
The Linq could generate $14.3 million in cash flow, while nearby Caesars casinos could pick up 1 million more customers spending as much as $15 each on average, the company said.
North of the Strip, downtown Las Vegas is also going through a transformation, driven by Zappos.com founder Tony Hsieh. His Downtown Project is investing $350 million to make the area more community-focused for residents and small businesses. He turned the old city hall into the headquarters for his online shoe store, now owned by Amazon.com Inc. (AMZN:US), and moved into a high-rise himself.
The Las Vegas Strip ranks as the world’s fourth-busiest tourist spot, with 29.5 million visitors, behind Times Square and Central Park in New York and Union Station in Washington, Travel + Leisure magazine reported in October 2011.
Caesars, the largest owner of U.S. casinos, rose 1.2 percent to $21.34 at the close in New York. The shares have more than tripled this year, outpacing (CZR:US) the Russell 2000 Index’s 26 percent gain, as the company refinanced debt and offered existing investors the option to buy stock in its online gaming.
The company is working hard to get more out of visitors. Caesars has annual interest expense topping $2 billion, and the High Roller/Linq investment equals almost all the money it earmarks for improvements in any given year.
“The only way they can really stay afloat is to get an incrementally bigger share of the spending,” said David Schwartz, director of the Center for Gaming Research at the University of Nevada Las Vegas. “The secret is not to build more beds, it’s to get more people in your restaurants and clubs. It’s a smart strategy.”
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