The Caesars Palace Coup

The Billionaire Brawl over the Bankrupt Caesars Gaming Empire

Sujeet Indap, Max Frumes

• Publisher: Diversion Books
• Year: 2021
• ISBN:
  9781635766769
• Topic: Business
• Subtopic: Business History
• Index: Business

It was the most brutal corporate restructuring in Wall Street history. The 2015 bankruptcy brawl for the storied casino giant, Caesars Entertainment, pitted brilliant and ruthless private equity legends against the world's most relentless hedge fund wizards. In the tradition of Barbarians at the Gate and The Big Short comes the riveting, multi-dimensional poker game between private equity firms and distressed debt hedge funds that played out from the Vegas Strip to Manhattan boardrooms to Chicago courthouses and even, for a moment, the halls of the United States Congress. On one side: Apollo Global Management and TPG Capital. On the other: the likes of Elliott Management, Oaktree Capital, and Appaloosa Management.The Caesars bankruptcy put a twist on the old-fashioned casino heist. Through a $27 billion leveraged buyout and a dizzying string of financial engineering transactions, Apollo and TPG—in the midst of the post-Great Recession slump—had seemingly snatched every prime asset of the company from creditors, with the notable exception of Caesars Palace. But Caesars' hedge fund lenders and bondholders had scooped up the company's paper for nickels and dimes. And with their own armies of lawyers and bankers, they were ready to do everything necessary to take back what they believed was theirs—if they could just stop their own infighting. These modern financiers now dominate the scene in Corporate America as their fight-to-the-death mentality continues to shock workers, politicians, and broader society—and even each other. In The Caesars Palace Coup, financial journalists Max Frumes and Sujeet Indap illuminate the brutal tactics of distressed debt mavens—vultures, as they are condemned—in the sale and purchase of even the biggest companies in the world with billions of dollars hanging in the balance.

Part I

A Numbers Game

Four assigned seats remained empty each day in class, and Gary Loveman was determined to find out why. He stood at the front of a Memphis conference room a long way from Harvard Business School where he had started as an assistant professor a year earlier in 1989. The prestige aside, the job did not pay particularly well. The real money for HBS faculty came from what he was doing now—teaching executive education seminars at Fortune 500 companies.

The Promus Companies was a hospitality business that had been spun out of Holiday Inn in 1989, the ultimate consequence of an effort to thwart a greenmail campaign waged by a budding Atlantic City tycoon named Donald Trump. The brands within Promus included hotel chains Homewood Suites, Hampton Inn, Embassy Suites, and the gaming company, Harrah’s. Loveman and a group of HBS professors were offering a course in consumer marketing. Every Promus executive seemed enthusiastic, except those who were assigned to the four empty chairs. Loveman learned that the four were all part of Harrah’s management and were at a bar just adjacent to the classroom Loveman was using at the University of Memphis. He was irritated enough to confront them.

“I’m just curious…You’re here in town, and we’re having these classes, and people seem to find them interesting, but you guys never show up,” Gary Loveman offered incredulously. He expected contrition, but the group instead told Loveman to buzz off. The four were guilty of one of the Harvard hotshot’s cardinal sins: the lack of intellectual curiosity.

“What struck me at the time was, here is a business, gaming, that has this elegant, underlying mathematization, which is always where my world has been. It throws off tremendously rich data, real time. And the people who run it are lightweights,” recalls Loveman.

At the time, the typical gaming executive had limited formal education and had risen up as a food and beverage manager. As Loveman spent more time understanding Harrah’s, he believed casinos were a sophisticated industry held back by unsophisticated operators.

Loveman’s elite credentials belied his humble origins. Growing up in Indianapolis, Indiana, the youngest of three in a working-class family, Loveman had experience with financial hardship. His father was a factory worker at Western Electric and his mother was a homemaker.

He attended Wesleyan University in Connecticut, then spent two years as a research assistant at the Federal Reserve Bank of Boston before joining the economics PhD program at MIT. Loveman grew close to Professor Robert Solow, a towering figure in macroeconomics who had won the 1987 Nobel Prize. In 1988, Loveman was considered the top American PhD student in labor economics. His thesis explored the difference in unemployment rates between the United States and Europe. Accepting the HBS professorship made his academic work more practical than theoretical.

Phil Satre, like Bill Harrah, did not care much for Las Vegas. He instead preferred Reno, which, coincidentally, happened to be Harrah’s ancestral home. Bill Harrah had fled Los Angeles in the 1930s where his bingo operation on the Venice Beach pier had drawn the ire of local authorities. Nevada had legalized gaming in 1931 and it was Reno, 400 miles northwest of Las Vegas, that became the state’s first gambling hotspot.

Harrah’s personal life would come to resemble that of many of the colorful entrepreneurs who would dominate the casino industry. A big drinker, he was married seven times to six women, and developed a taste for fancy toys, buying a collection of airplanes and automobiles with the help of the company’s coffers.

Satre could not have been more different. Satre was a Stanford graduate and lawyer by trade. He was considered a gentleman in the edgy world of gambling, and after first joining Harrah’s in 1980, became chief executive in 1994.

Harrah’s had spun out of Promus in 1995, the latest in a string of hotel companies separating from more modestly valued casinos. Satre kept the Harrah’s headquarters in Memphis. For years, Harrah’s was just four properties: three in Nevada and one in Atlantic City. But in the 1990s, Middle America was becoming more open toward gaming and, more importantly, the tax revenue that came with it. As gaming licenses proliferated in Mississippi, Louisiana, Missouri, Iowa, and elsewhere, it was an advantage to be considered a company from down South. Harrah’s would win several riverboat and Native American licenses as they started to come up.

But the company stagnated after that initial wave of regional properties was built. Satre needed a different strategy to keep up with the likes of Steve Wynn’s The Mirage, with its pyrotechnics and waterfalls.

His only play was marketing; taking a commodity product—gambling—and getting players to pick Harrah’s over and over again. Satre became convinced he needed to look outside the insular casino industry. The marketing wizards of that era were in consumer products and retail, getting Americans to buy paper towels or cheeseburgers by creating brands that were able to build long-term connections with customers.

Loveman continued his executive education courses at Harrah’s through the mid-90s while his academic career was taking off. His booming baritone and dry wit made his classes popular and he was racking up teaching excellence awards. In 1994, his Harvard Business Review paper “Putting the Service Profit Chain to Work,” written with four other HBS professors, cemented his status as a marketing guru. Drawing upon the examples of Southwest Airlines and Banc One, the paper tied together how motivated employees could create an experience for customers that drives their long-standing loyalty, which in turn can efficiently create massive returns for shareholders.

Satre was intrigued by Loveman’s work, and in 1996 invited him to be an ex-officio member of management while keeping his Harvard position. Loveman began shadowing Satre, joining executive meetings when he could. When both were in Atlantic City at a meeting in 1998, Satre asked Loveman if he would be interested in a dedicated role: chief operating officer.

Everything about Loveman—his competitive nature, intellectual curiosity, ambition—pulled him toward accepting this job. Even on the brink of achieving tenure, Loveman had become restless. Satre’s offer was for two years—the maximum leave he could take from Harvard—so it was not a long-term commitment. His family was firmly rooted in suburban Boston, and Satre would allow him to commute by private jet to Memphis.

The COO perch gave Loveman the power and credibility to implement his ideas rather than being marginalized in middle management. “It was critical that I was COO. For what I wanted to do, I needed P&L control,” Loveman explained, referring to his autonomy over the spending on the marketing initiatives he would champion.

“I could say to them, ‘You will do this,’ and they pretty much had to do it,” recalls Loveman. “And then once it started working, it made everything dramatically easier. ‘Holy shit, look at this, this actually works. We can drive revenue, we can build same store sales, hit our numbers and get our bonus.’”

Gary Loveman’s career as a casino executive took off in a Memphis pizza parlor. His mission was to understand everything about those people who gambled at Harrah’s tables, ate in its restaurants, and slept in its beds, so he could persuade them to never stray.

Loveman wanted to build a data-driven loyalty program where Harrah’s would precisely track how customers spent their time and money, and then would direct micro-targeted offers—say, a free room, or steak dinner, or gambling credit—that would get a customer to turn up based on their revealed preferences. This was a Big Data project well before the term had been coined.

With nothing else to do during his weeknights in Memphis, Loveman planted himself at The Memphis Pizza Cafe and sketched out a new loyalty program. He was joined first by Richard Mirman and later, David Norton, who exemplified the type of executive Loveman would flood Harrah’s with over the next decade: white men with elite educations who were fluent in concepts like “same store sales,” “customer acquisition cost,” and “lifetime value of the customer.”

Rich Mirman had reached all-but-dissertation status on a math PhD at the University of Chicago and knew Loveman from a case study the professor had written on the management consulting firm, Booz Allen Hamilton. Norton was a Wharton grad working for American Express and had become acquainted with Mirman when they overlapped at Booz Allen.

Harrah’s had existing loyalty programs, but they were uneven. Customers simply took their free rooms and dinners and then went across the street to do their gambling.

Using transaction data, the three developed quantitative models to tailor incentives to customers based on what their previous behavior revealed about their habits. In late 1998, just months after Loveman had come on board full-time, the Total Rewards loyalty program pilot was to launch in Tunica, Mississippi. Direct mail was sent to Harrah’s customers with differentiated offers based on their hypotheses of customer behavior. “One customer would get $150 a night room rate, another $89 a night, a third might get it comped. We calculated the expected value of a guest before they called,” explained one Harrah’s executive.

Total Rewards was an immediate success. The local casino managers had little understanding of the underlying calculations but saw revenues jump in response to targeted marketing.

Loveman had found his dream job. Gaming touched customers in so many ways—at card tables, slot machines, hotels, restaurants, spas, golf, nightclubs—and he was running a business in a way that had never been done before. Ever the competitor, Loveman eagerly awaited daily revenue reports that told him if he was winning or losing. The monotony of academia never felt farther away. Loveman was conservative in his personal life, and had a growing family. But Gary grew to enjoy the buzz of the gaming industry and the chance to reinvent it: “Las Vegas was a blast compared to hanging around HBS for nine years.”

Harrah’s relocated its headquarters to Las Vegas in 1999.

Then, between 1998 and 2002, Harrah’s revenues nearly doubled from $2 billion to nearly $4 billion. Its stock price was up 200 percent in that period. In 2002, Satre and the board informed Loveman he was being tapped for the top job. At the age of forty-three, Gary Loveman was the chief executive of what would soon be the largest gaming company in the world. The company had agreed to let him continue commuting to Las Vegas by private jet, keeping his family life separate in Massachusetts.

A unique experiment was about to begin. Loveman, who had never had a corporate job before becoming COO, was to become the public face of a heavily unionized and politically and socially fraught company. He was good in front of a big audience but had to learn to connect with different kinds of people in smaller groups. “Most people thought I’d leave in two years and go back to Harvard. They thought this would be like a kidney stone. It would hurt for a while, and then it would pass,” Loveman would quip.

“In those early years, Gary was my hero, he was so smart, he had a booming voice and sharp wit, he was so excited to be CEO, he had grand visions for the company. Everyone was really motivated by him, galvanized by him. It was very heady times,” said Jan Jones, who joined Harrah’s in 1999 to run government affairs after serving as mayor of Las Vegas.

Loveman would go on to remake the leadership ranks of the company, increasingly finding talent from top business schools and management consulting firms. Loveman made no mystery about whom he favored: “I want to see evidence that someone has achieved a high level of success in some facet of their lives so I can be convinced that they know what a high level is and that they can aspire to it successfully. This could mean having run a business successfully, having run a project successfully, having done well academically, having been a great athlete, etc. If I didn’t see any of these things, I probably wasn’t very interested.”

Harrah’s had transformed into a well-oiled machine. The organization from top to bottom was singularly focused on the user experience. Chuck Atwood, the company’s chief financial officer in the early 2000s, said, “We were talking about customers, everyone else was talking buildings,” referring to the likes of Steve Wynn, Sheldon Adelson, and Kirk Kerkorian.

At the turn of the century, Harrah’s spent billions adding regional properties around the country as well as snatching up the iconic Binion’s Horseshoe in Las Vegas along with the World Series of Poker intellectual property.

Even after all this wheeling-and-dealing, Harrah’s was still an also-ran in Sin City. By the early 2000s, MGM Grand was the dominant player, having acquired Mirage Resorts for $4 billion in 2000 and Mandalay Bay for $8 billion in 2005. Wynn was already plotting a comeback, and Sheldon Adelson’s Venetian had opened in 1999.

Loveman’s best shot at conquering Las Vegas would be Caesars Palace, which had been built by Jay Sarno, a son of Jewish immigrants who had settled in Missouri. Sarno had started out building motels in the South but after visiting Vegas in the 1950s, believed it needed an upscale property. The Roman antiquity theme was to play to guests’ urges for hedonism and decadence. Caesars Palace was built with Teamsters money and, notwithstanding ties to organized crime, Sarno’s vision quickly became the most famous casino in the world. Ironically, Caesars, when it was independent, found itself in the middle of the Michael Milken criminal proceedings. The junk bond king had been accused by the federal government of insider trading in Caesars bonds where his firm, Drexel Burnham Lambert, was leading a debt restructuring of the company in the 1980s.

In the summer of 2004, Harrah’s announced it would acquire the newly re-christened Caesars Entertainment—which would give it not just Caesars but Bally’s, the Flamingo, and the Paris hotel—for $9 billion. Loveman and team would efficiently capture the benefits of putting these new properties in the Total Rewards system. Harrah’s stock price continued to soar, which would pique the interest of a different kind of math wizard.

Kings of Leon

There was little love in the air at Drexel Burnham Lambert this Valentine’s Day in 1990. Marc Rowan, then twenty-seven years old, walked out of Drexel’s New York office at 60 Broad Street with his office belongings in a cardboard box. The high-flying investment bank had dominated Wall Street in the 1980s with its mastery of the junk bond, a previously misunderstood form of financing for riskier—or more marginalized—companies.

But Drexel’s wild ride of the previous decade had ended with an abrupt thud.

On February 13, Drexel filed for Chapter 11 bankruptcy protection after pleading guilty to six counts of securities and mail fraud a year earlier—the fallout of the sprawling and spectacular white-collar crime spree masterminded by its larger-than-life banker, the so-called “junk bond king,” Michael Milken. Milken himself was facing ninety-eight counts of insider trading, securities fraud, and racketeering related to accusations of massive self-dealing while running the Drexel junk bond unit.

In his five years at Drexel, Rowan established himself as an uncommonly sharp thinker on finance. After graduating from Wharton with both an undergraduate and MBA degree in 1985, he’d been hired as a junior investment banker, a position which involved plugging numbers into spreadsheet models and drafting investment memos. But his colleagues noticed he was already capable of far more.

His ability to think strategically and devise creative solutions for clients—even in his mid-twenties—was unrivaled. He had secured the flattering moniker, “managing analyst.” The term combined the title of “managing director” and “financial analyst,” the highest and lowest rungs on the typical project team, given Rowan’s ability to run all parts of a deal on his own. “Marc would sit in meetings and then say, ‘Let me go home and think about this structure,’ and he’d come back with some triple backflip no one else had thought of,” according to one senior Drexel banker who was involved in Rowan’s hiring.

Drexel’s free-wheeling environment allowed Rowan to shine. Yet the firm’s scandals and subsequent implosion made his career choice look unwise on that winter day in 1990 (years later Rowan would quip that in his time at Drexel he worked directly for three executives—Dennis Levine, Martin Siegel, and Michael Milken—all of whom went to jail for committing financial crimes).

In the early 1990s, the US was a...