Starwood wants to sell Caesars properties

Starwood Hotels & Resorts Worldwide, which has already put The Desert Inn up for sale, now wants to unload its Caesars World hotel-casinos, The Wall Street Journal reported today.

Citing people familiar with the company's strategy, the financial daily said Starwood Chairman Barry Sternlicht is seeking about $3 billion for the 11 Caesars properties in Las Vegas, Atlantic City and elsewhere.

Starwood Senior Vice President Jim Gallagher said today the company doesn't comment on "market rumors." But the story prompted speculation Sternlicht may be floating a trial balloon to see if there are any potential buyers at the proposed price.

At least one prominent Wall Street gaming analyst said today $3 billion would be too costly for other gaming companies to pay.

"The Caesars World operations did about $318 million of cash flow last year," said David Wolfe of CIBC Oppenheimer & Co. "And depending on what you think (Caesars new Indiana riverboat) the Glory of Rome is going to do this year, $3 billion would imply a cash-flow multiple of 8.3.

"That would pretty much eliminate any other gaming company because it would be dilutive to earnings. Gaming companies are all selling for below that multiple. Most acquisitions are between seven and 7.5 times cash flow."

The Journal story also said the potential sale would be a change in strategy for Sternlicht, who immediately after acquiring casino properties in the ITT Corp. merger last year said he wanted to sell The Desert Inn but study Caesars World operations for a year before determining what to do with them.

However, even before the merger Sternlicht had tried to line up buyers for ITT's gaming properties, offering Caesars World and The Desert Inn to Mirage Resorts Inc. for $4 billion.

Based on cash flow at that time, Mirage executives concluded ITT's casinos were worth about $2 billion.

"In fairness to the Starwood management, they said they wanted to analyze the operation under their corporate umbrella before making any decisions," Wolfe said.

Now, with a year of casino operations studied, the real estate investment trust's management has decided to concentrate on the hotel business, according to another Wall Street analyst.

"If you're focused on the casino business, you can operate it better," said Andrew Zarnett of Ladenburg Thalmann & Co. "Starwood isn't focused on casinos but on hotels. They're concentrating on integrating their new hotels and giving customers a better value for staying at those hotels.

"The effort is on the hotel side. A casino without full attention deteriorates over time," Zarnett said.

"When Caesars lost (current MGM Grand Inc. Chairman) Terry Lanni, they lost a very important part of their company. And Lanni brought some key Caesars people to MGM Grand, and look at how well they've done there. And Caesars has suffered."

Wolfe said Starwood has had a lot more to cope with than managing casinos in an increasingly competitive environment.

"Last year they had so much to deal with. If it wasn't Washington and their corporate structure, it was integrating the hotels, which by my calculations make up 77 percent of their revenue," Wolfe said.

Congress passed tax-law changes last year that forced Starwood to revamp its organizational structure from a pair-share REIT.

"Now they can look at Caesars and see if it belongs long term under their business plan," Wolfe said. "They can take a closer look at the uncertainty of Atlantic City.

"Sure, they'll do fine there this year and next, but what about 2001 and beyond? There's some question about where the cash flow will go, because there's a fairly well-known casino developer who isn't going to enter that market quietly," he said, referring to Mirage Resorts.

"There's also the question of where Caesars Palace will come out in Las Vegas, where Bellagio's new hosts are building up their high-end clientele and the MGM Grand's Mansion is coming on in less than two months. There's going to be some market-share shift in the next year. And Mandalay Bay is going to capture come of that business. It's a really nice property."

Adding to the incentive to sell Starwood's gaming properties is the company's high debt, which was $8.8 billion on Dec. 31. Starwood has sold other assets acquired in the ITT merger and used proceeds to pay down some debt, but had to postpone a planned $3.5 billion refinancing due to adverse bond-market conditions.

It could use money from the sale of Caesars World casinos to de-leverage its balance sheet somewhat, then resume its aggressive strategy of buying hotel assets, thereby strengthening its position as the world's largest lodging company.

The New York Post reported that Sternlicht and Arthur Goldberg, chairman of Park Place Entertainment Corp., have met to discuss a possible buyout of the Starwood gaming properties by Park Place, which is in the midst of integrating Grand Casinos Inc.'s Mississippi casinos into its organization.

"I have no doubt that Goldberg and Sternlicht have discussed the opportunity for Park Place to buy Caesars," said Zarnett. "But Arthur's a tire-kicker who happens to look at everything out there.

"Goldberg's in the driver's seat. He doesn't have to buy it. But Park Place has the resources to buy it and the management talent to operate it. And Sternlicht at some point needs to sell it because casinos aren't within the primary expertise of Starwood."

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