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Gambling with debt

Gary Loveman likes to explain the gambling business in words that could only come out of the mouth of a Harvard management professor who ended up running a giant casino company.

The chief executive of Caesars Entertainment Corp. will tell you that his industry exists to offer an “opportunity for people to place a modest bit of consideration on the realization of an uncertain outcome.’’ He delivered that line for laughs to a packed room at the Boston College Chief Executives’ Club of Boston luncheon last week and hit the mark.

Loveman, a Wellesley resident who did indeed teach at Harvard Business School, was no random selection as the event’s speaker. His company wants to build a new gambling resort with Suffolk Downs in East Boston, and they are widely seen as favorites to win the state casino license reserved for Eastern Massachusetts. If casino gambling finally comes to Boston, Gary Loveman is probably the person who will bring it here.

Caesars itself brings lots of experience and enormous scale to any casino development proposal. But the company also lugs around a mountain of debt that should make anyone pause.


How big is the business? Caesars operates 52 casinos in a dozen US states and seven countries. Those facilities operate about 3 million square feet of gambling space (nearly double the number of rentable square feet in the John Hancock Tower) and 42,000 hotel rooms. That operation generates roughly $9 billion in annual revenue, an average of about $1 million for every single hour of every day in a year.

Here’s something the company’s vast gambling empire finds it difficult to produce: a profit.

Caesars earns lots of money from its operations but spends nearly every penny of it - sometimes more - on interest payments. That’s the biggest reason why the company has reported an annual profit only once over the last four years.


In an industry crammed with companies that borrow lots of money, Caesars is an especially indebted competitor. The company’s assets amount to nearly $29 billion but the pile of debts approaches $20 billion.

Caesars reported earnings before interest, taxes, depreciation, and amortization - roughly the cash income generated by its business - totaling nearly $1.4 billion through the first nine months of last year. But the company interest payments for that period were $57 million more.

Caesars was taken private in 2006 near the peak of the previous bull market. Private equity investors Apollo Global Management and TCP bought the company for $17 billion in a highly leveraged transactions.

The ensuing recession was hard on Las Vegas and its leading gaming companies. Revenues at Vegas casinos actually went down - something that rarely happened in previous recessions - and companies such as Caesars found it difficult to restructure or refinance their debts.

Another problem for Caesars: It failed to secure a gaming license in Macau, the tiny island off mainland China where casino moguls Sheldon Adelson of Las Vegas Sands Corp. and Steve Wynn of Wynn Resorts Ltd. are making fortunes from their new facilities.

But Caesars is expanding wherever it can in America as more states legalize casino gambling. The company will open Ohio’s first casino in Cleveland in May.

Caesars raised a very modest $16 million when it sold less than 2 percent of the business in an initial public stock offering early this month. The company had previously planned to raise $500 million in an IPO that never got off the ground in 2010. The new Caesars shares jumped from $9 to $15.39 on their first day of trading but have since retreated, closing most recently at $12.56.


Caesars’ best growth opportunities may lie in online gambling, the antithesis of big casinos like the one the company wants to build with Suffolk Downs. Loveman raves about the explosion of Internet-based games of all kinds, and Caesars - the company that owns the World Series of Poker - could profit handsomely if online poker becomes legal in the United States.

Caesars is a business gamble that pits growth potential against heavy debt obligations. Now public shareholders can put their money on, as Loveman likes to say, the realization of an uncertain outcome.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.