Harrah's Focuses on Foreign Affairs

Harrah's Entertainment, the world's largest casino company since it swallowed Caesars Entertainment this year, is turning some of its attention to distant shores.

Opportunities for continued casino growth in America have not come to fruition recently. In the past few years, new potential markets in several states, such as Maryland, Nebraska and Kentucky, were thwarted as proposals to legalize slot machines failed to win approval. And in some other states with casinos, tax rates were raised.

So Harrah's executives have reached for their passports.

In recent weeks, Harrah's has announced joint venture deals to build casinos in the Bahamas, Spain and Slovenia. The company recently applied for one of two coveted licenses to build a major resort in Singapore, and it is eyeing other prospects in the United Kingdom, the Chinese province of Macau and the Netherlands.

"The opportunities are certainly bigger (abroad) because the circumstances are so prominent," Harrah's Chief Executive Gary Loveman said. "You have a large population of underserved customers, not nearly as many competitors and the ability to construct attractive facilities at a reasonable rate of taxation."

Harrah's is particularly interested in Europe and Asia -- places with large populations that gamble and governments that are open to using casino resorts to boost tourism.

Besides the opportunity to acquire more properties in its key markets -- Las Vegas and Atlantic City -- a primary justification for the Caesars acquisition was the opportunity to build Caesars-brand casinos worldwide, Loveman said.

"The brand became a platform for international growth at the luxury end of the business," Loveman said. "As we came close to the completion of the deal we began to look internationally. Caesars is enormously well known and is by far the most powerful brand in gaming."

Caesars was well under way with an expansion plan that included Singapore, Macau and the United Kingdom before Harrah's bought the company. But Harrah's intends to be much more aggressive than its former competitor in securing deals.

Harrah's recently announced plan to build a Caesars resort in Spain, for example, resulted from a deal that Caesars Entertainment was previously working on in the region. The Slovenia agreement, though, was generated by Harrah's.

In a research note to investors last week, Morgan Stanley analyst Celeste Mellet Brown said that given the relative lack of competition in some foreign markets, she expects Harrah's to generate returns on its European projects that are similar to or greater than those available in the United States.

"(T)he company's already large size in many U.S. markets could limit its ability to grow domestically through acquisitions and new projects," Brown said.

The Innovation Group, a gaming industry consultant with offices nationwide, has many clients who are looking abroad for a number of reasons, including competitive pressure from a growing number of casinos in the United States.

"The trend for operators to raise capital in public markets has forced operators to seek out consistent growth," consultant Matthew Landry said. "I think there's always been interest (abroad), but now there's opportunities."

Loveman said while there is strong interest in gambling abroad, "there's no Vegas-style casino destination resort anywhere in Europe today."

As in the United States, regulatory restrictions have prohibited the spread of casinos in Europe. And in many European countries that already allow casinos, language, culture and prohibitions on direct ownership pose barriers.

Harrah's intends to pursue foreign projects with partners -- a lower-risk strategy that analysts say makes sense for a company breaking cultural barriers.

Harrah's is proposing luxury resorts in Spain and Slovenia with 800 rooms or more and 50,000-square-foot casinos -- properties that are bigger than existing ones. Spain allows local communities to regulate casinos, but Harrah's hopes some restrictions on casino marketing and advertising will be lifted so the company can lure customers the same way it does in the United States.

And before Harrah's can participate in Slovenia, the country must change a law prohibiting more than 25 percent ownership by non-European Union countries, Loveman said.

The company also expects Slovenia to lower a tax rate that now hovers at about 50 percent of gambling income. Spanish casinos are taxed at rates ranging from about 20 percent to 55 percent. By contrast, Nevada's top tax rate is 6.75 percent, the lowest in the United States.

Harrah's expansion plans are part of a natural evolution for the industry, said Jonathan Galaviz, a Las Vegas-based gaming analyst who specializes in Asian markets.

Harrah's is one of a few companies with the ability to make large-scale capital investments worldwide, Galaviz said. With the Caesars acquisition, Harrah's is in a better position to expand abroad with a more desirable brand.

"Consolidation now enables these companies to have economies of scale to levels that have never been experienced before," Galaviz said.

"And the industry has evolved to where the senior management teams of these companies are very sophisticated. It's one more indication of how Las Vegas is becoming corporate and multinational in nature."