As the gaming industry enters a period of record cash flows, Las Vegas' largest players appear more concerned about strengthening their balance sheets rather than adding new properties.
The chief financial officers of Park Place Entertainment Corp. and Harrah's Entertainment Inc. addressed the National Gaming Conference this month. The event is an annual conference hosted by the Nevada Society of Certified Public Accountants. Both men said their companies will be more focused on stock buybacks and debt reduction over the next few years.
"We have a golden opportunity over the next two to four years to drive incremental income increases," said Scott LaPorta, CFO for Park Place. "So long as we deploy our capital correctly, we'll see a golden two to four years."
Larry Krause, a partner in the Las Vegas office of Arthur Andersen, estimated in an earlier session that the gaming industry would produce $2 billion in cash flow this year -- but only had $1 billion of this capital earmarked for capital projects. That leaves the door open for sizable stock buybacks and debt reductions.
In 2000, LaPorta said he expects Park Place to generate $500 million to $600 million in free cash flow, rising as high as $700 million in 2001. Free cash flow is defined as cash flow minus capital expenditures on maintenance and new projects.
About one-third of that cash, LaPorta said, will be invested in "(return-on-investment) driven projects," particularly upgrades to Park Place's portfolio. But the remaining two-thirds -- as much as $870 million -- will be split between debt reduction and stock repurchases, LaPorta said.
"We'll be doing lots of basic blocking and tackling, paying down debt, buying back stock ... positioning ourselves for growth in the future," LaPorta said.
Park Place recently announced a stock buyback plan that would allow the company to repurchase up to 12 million shares of stock, or about 4 percent of its outstanding shares. In the first quarter, the company repurchased 1 million shares at an average price of $12.60.
It's a philosophy echoed by Colin Reed, CFO of Harrah's. Over the past 12 months, Harrah's has bought back about 12 million shares of its own stock. Within two years, the company may repurchase as much as 20 percent of its outstanding stock, Reed said.
"Our stock price is not anywhere near where we'd like it to be," Reed said.
The reason Harrah's won't spend that cash on new development, he said, was that the company wants to be conservative about new investments.
"We haven't squandered capital on poor performing businesses," Reed said. "Tons of capital go into these (new projects), and returns have been abysmal. That's why the industry's perception on Wall Street is going to be poor."
"We will not make any investment ... that doesn't generate a 12 percent after-tax return."
In an earlier session, Harrah's Chairman and Chief Executive Phil Satre said some of that capital could be invested in upgrading and refining existing properties.
"We opened up so many casinos so fast (over the past several years) ... with little thought to what we were opening," Satre said. "We didn't give much thought to that (high-quality) heritage. We are going to get back to that heritage, because it's an important part of the company.
"The product I'd like to create ... are products that meet and exceed the expectations of (the frequent gambler)."
But after three acquisitions in recent months, Reed suggested Harrah's is ready to slow down its buyout pace.
"We don't buy because we want to be the biggest," Reed said. "We want the distribution to certain markets. We're in 18 markets now. There's not a whole lot of markets left (for gaming expansion).
"I don't think you'll see us (moving) so aggressively as we have in the last 18 months."
Park Place, on the other hand, appears as committed to future acquisitions as it has been in the past -- at least in the long-term, LaPorta said. Park Place's philosophy is that gaming operations represent a commodity business, LaPorta said -- and some of the most attractive returns come from consolidating this business.
"It's the best way to make money for your shareholders," LaPorta said. "We've been a major leader in the consolidation of the industry, and we will continue to be a leader in the future."
In comparison to its competitors, Station Casinos Inc. will take a much more aggressive position on new development, said CFO Glenn Christenson.
Of the $118 million in free cash flow expected in 2000, Christenson said about $87 million will be spent on new capital projects, such as the $55 million expansion of Texas Station in North Las Vegas and the development of a new $270 million resort casino in Green Valley.
This casino is being built in partnership with American Nevada Corp., owned by the Greenspun family, owners of the Las Vegas Sun. Station will put $40 million cash into the project.
"We've already spent $25 million on stock buybacks this year," Christenson said. "With substantial free cash flow, we can make significant investments in master plan expansions or new projects without releveraging our balance sheet."
The reason Station is so willing to invest so heavily in new projects, Christenson said, are the returns on investment Station is seeing on projects devoted to Las Vegas locals. Its most recent investments have generated a 31 percent return on investment, Christenson said.
Most large new casinos on the Strip, by comparison, generated returns below 15 percent, Christenson said.
"We think the Las Vegas locals market has the best fundamentals of any gaming market in the country," Christenson said. "There aren't many gaming companies that have the pipeline of (expansion) opportunities that we have.
"There are opportunities for acquisitions in this market, and we will continue to look at those."
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