Following on South Korea, Caesars bids bold for the Philippines — a billion dollars — and an Asia strategy takes shape.
The Philippines has a long relationship with the US and ambitious plans to expand its gaming industry, but it doesn’t have any US casino brands. Caesars Entertainment has famous US casino brands—Caesars, Harrah’s and Horseshoe among them—and Asian expansion ambitions. For years, Caesars and the Philippines have seemed like a natural fit. Caesars believes the time has come for the Las Vegas-based giant, the largest operator in the Americas by number of casinos, to build an integrated resort in Manila. But not so fast, says the Philippines’ gaming regulator.
President Benigno Aquino heard the case for the resort from Caesars Chairman and CEO Gary Loveman during a visit to the US in September. Caesars President for International Development Steven Tight, who also attended, says the meeting followed discussions “over the past couple of years” about a Manila IR with the state-run Philippine Amusement and Gaming Corporation (PAGCOR), which regulates the industry and operates 11 Philippine casinos. PAGCOR confirms that Caesars has submitted a “concept proposal” for which the agency would need to create a new private gaming license in Manila in addition to the four issued for the PAGCOR-sponsored Entertainment City resort complex on Manila Bay and the license underpinning Resorts World Manila, currently the country’s largest casino, located opposite the city’s Ninoy Aquino International Airport.
“The timing is really linked to the success of President Aquino’s reforms in the Philippines,” Mr Tight says. “The business environment in the Philippines has improved significantly under President Aquino. His reforms have been effective. We’re more comfortable with the business environment from a compliance perspective. The Philippines is now rated investment grade, and that’s another factor that gives us comfort, that we’re able to operate within our own levels of integrity and compliance standards under President Aquino’s administration.”
The fact that two gaming companies that operate in the Philippines through affiliates, Malaysia’s Genting Group and Australia’s Crown Resorts, are expected to be granted Nevada licenses for large-scale casino developments on the Las Vegas Strip, also suggests that the credibility of the Philippines has improved in the eyes of international gaming regulators.
“That reflects the comfort that the large integrated resort operators have in pursuing the Philippines at this time,” says Mr Tight.
“PAGCOR has been exerting serious effort since 2010 to establish a proper regulatory framework,” the agency’s Vice President for Licensing and Development Francis Hernando says. “In particular, PAGCOR has successfully managed what had been viewed early on as a worrisome situation, the operator/regulator dual role.” Yet Mr Aquino’s cabinet is divided over an additional license for Manila, according to news reports, with the Department of Tourism in favor, PAGCOR in opposition, and the Department of Finance “in between the two,” according to the president. The Catholic Church, an influential voice in matters of social policy, is expected to oppose another casino license, he has said.
ON THE FLY
Caesars wants to bring a novel concept to Manila. “We are pursuing a site adjacent to the airport,” Mr Tight says. “It would be a unique opportunity to create something truly differentiated, where you could fly in directly to the resort. That’s something we’re discussing with the airport authority.
” Caesars’ involvement would also include efforts to improve Ninoy Aquino, ranked as one of the world’s worst international gateways.
The direct connection might include private plane passengers entering the resort from the runway, allowing arriving guests to bypass Manila traffic and blight as well as alleviate the security concerns that reportedly weigh on Chinese travelers.
PAGCOR closed its money-losing Airport Casino Filipino, one of the largest in its portfolio, earlier this year, but Mr Tight says that site would not be suitable because it’s not directly adjacent to the airport. Entertainment City, about five kilometers from the airport but subject to the vagaries of Manila traffic, is also not of interest, he says.
What the company is proposing is “a full-on integrated resort,” as he terms it. “It would have a couple of hotels, a very high-end hotel along with a five-star hotel, so definitely positioned as Caesars is in the US at a high level of quality and luxury. We would have an arena of sorts and a cultural component as well.”
Gaming would be targeted at VIP and premium mass customers, he says.
For retail, dining and entertainment, Caesars wants to emulate The Linq, the outdoor shopping and nightlife district the company opened on the Las Vegas Strip earlier this year, anchored by the world’s tallest observation wheel, The High Roller.
“We’d like to do something like that in Manila,” Mr Tight, a former Disney executive, says. “Not with the world’s highest wheel, but a pedestrian outdoor entertainment district that runs the spine of the plan and integrates the various hospitality offerings of the resort.”
The property could open about three and a half years after receiving approval from the authorities, he says.
President Aquino said Caesars forecasts 70% of the IR’s revenue will come from non-gaming sources, local news site Rappler reports. That would be better than the 65% non-gaming revenue that Las Vegas Strip resorts book and on a percentage basis more than double that of Marina Bay Sands, regarded as Asia’s top non-gaming performer.
“Our master plan is over a billion [US] dollars of investment,” Mr Tight says, adding that a precise budget will be contingent on the final location, whatever terms might be attached to the government’s approval, and on how the plan eventually unfolds.
Caesars’ billion-dollar figure equates to the minimum investment required of the four Entertainment City licensees, but PAGCOR Chairman Cristino Naguiat has said his agency is considering raising the minimum for future projects to $1.5 billion.
At the same time, Mr Hernando says it is “premature” to think about the details of a Caesars license. Because even if the “long and tedious” licensing process (his words) were to proceed, “PAGCOR would likely look at crafting terms that are more advantageous to the government than the existing licenses.”
Earlier this year, the agency cut its gaming license fees, effectively the gaming tax, for current licensees by 10 percentage points to 5% on VIP revenue and 17% on mass-market revenue and scrapped its 5% franchise fee to offset the impact of a court decision making PAGCOR and the private operators subject to the nation’s 30% corporate income tax.
The court ruling could have dealt a serious blow to the government’s plans for Entertainment City, the special resort zone carved out of 120 hectares of reclaimed land along Manila Bay for the purpose of attracting investment and providing badly needed jobs. Four resorts are licensed for the district. Solaire Resort & Casino was the first to open. Controlled by Philippine ports magnate Enrique Razon, it debuted last March. Melco Crown Entertainment’s City of Dreams Manila is expected to open in the coming weeks in partnership with the Philippines’ richest man, Henry Sy. Japanese pachinko mogul Kazuo Okada’s Manila Bay Resorts is expected to open in 2016. Bayshore City Resorts World, scheduled to open in 2018, is being developed by Travellers International Hotel Group, the partnership between Genting Hong Kong and Philippine property billionaire Andrew Tan’s Alliance Global that also operates Resorts World Manila. Opened in 2009 and continually expanding, RWM lies across the road from Terminal 3 of Ninoy Aquino but is not directly accessible to it.
There would be obvious competitive ramifications from Caesars’ entry into the market, but according to one source, PAGCOR has not consulted with the Entertainment City licensees about the possibility. As Laurence Hawke put it—he’s senior vice president of Casino Finance for Manila Bay Resorts operator Tiger Resorts, Leisure and Entertainment—“Entertainment City was never touted as exclusive. But current investments are probably made on the assumption that four groups would make up Entertainment City.”
Mr Naguiat has said, “If we will bring in someone new, there has to be value-added.
Of course, Caesars believes there is. “Our feeling is that bringing what would really be the first major international brand to the marketplace differentiates us,” says Mr Tight.
Speaking recently in Manila to the Foreign Correspondents Association of the Philippines, President Aquino said that within his cabinet “there is a sector that believes Caesars is a brand name that kind of tells the world that … in a sense, we have arrived”.
Others might dispute that. “We don’t think the Caesars brand has any notable legs in Asia, so the brand in and of itself wouldn’t necessarily be a driver of visitation,” says a regional gaming analyst who asked not to be identified. “Caesars, however, is a storied name in the gaming industry, which would lend credibility to a market like the Philippines.”
Mr Hernando says that while the interest is “flattering,” PAGCOR prefers to take a wait-and-see approach.
“Caesars submitted a concept proposal and met with PAGCOR a couple of times, but in both instances they were told that PAGCOR prefers to substantially complete Entertainment City first and gauge the capacity of the market to absorb supply before going in depth into the possibility of a fifth licensee.”
A prudent course, says the analyst. “It isn’t clear to us that the market will be able to support three or four IRs, let alone a potential fifth IR. City of Dreams Manila opening in late 2014 will be a good indicator if the market can support incremental supply. Our gut tells us that the return on investment story will be very long-tailed.”
Pointing to Solaire, which posted about US$100 million in EBITDA for the first half of this year, Mr Tight says Caesars is confident in the future of the Philippine market. “With the addition of capacity from folks like Melco Crown, I think you’re going to continue to see that [market] grow as a true alternative for Chinese looking for gaming experiences and a quality gaming operation in Southeast Asia. As you look at the developments in Macau and in Singapore, the customer that we target is looking at alternatives, and given the location of the Philippines and a lot of these developments we’ve talked about from a business perspective, I think it will be a strong competitor to those other markets.”
The real magic for Caesars would be the potential for linking a Manila IR with the US$800 million resort casino the company is developing near South Korea’s main international airport at Incheon, about 30 kilometers west of the capital of Seoul. South Korea is enjoying a boom in Chinese tourism, and like the Philippines is increasingly looking to gaming as a way to leverage that as an economic development tool. Paradise Group, the country’s largest operator of foreigners-only casinos (Korean nationals are restricted by law to a single casino in a remote northeastern province), is also building in Incheon, and reports are the government may authorize three more casinos for the expansive special economic zone where the Caesars and Paradise projects are located.
South Korea also is the top source tourist market for the Philippines, providing about a quarter of the country’s 4.7 million visitors last year.
“We are hoping Koreans will have a chance to experience all of the non-gaming we have in Incheon and by giving them a taste of that and exposing them to our brand, having a Caesars gaming opportunity in Manila for them to enjoy would be a great complement,” Mr Tight says.
The China play may prove a little harder to finesse, according to the analyst cited above. “It’s always good for a company to have multiple properties where its players can visit, so in that respect Incheon could help Manila. However, we believe that projects in Korea are primarily going after northern Chinese customers, while projects in the Philippines would naturally try to capture southern Chinese players. So there could be a geographical disconnect.”
He adds, “Without a toehold in Asia, Caesars would otherwise have no shot at participating in other Asian growth stories.” However, he considers Manila and South Korea “very much second tier markets” which alone may not be enough to make the company a winner in the region.
But for Caesars the potential synergies are compelling. The company is struggling under US$20 billion-plus in debt, the result of a leveraged buyout in 2008, and battling scanty same-store growth in the US regional markets where it’s heavily invested. In its former life as Harrah’s Entertainment it famously declined to bid for a Macau concession and then failed to make the cut a few years later for one of Singapore’s two IRs. It’s looking now to make up for lost ground.
“Our other objective is to create a network of properties throughout Asia, just as we have in the US,” Mr Tight says. The glue would be a loyalty program along the lines of the pioneering Total Rewards program Harrah’s developed with great success in the US. “We would hope to do the same in Asia,” Mr Tight says. “The fact
that we have the project in development in Incheon, we may have something in the Philippines if the government agrees, it plants the seed for future network opportunities in other parts of Asia as well, whether it will be in markets such as Vietnam, in Japan if the Diet eventually decides to pursue gaming, or in other markets in Asia—that all strengthens our strategy of a really comprehensive network.”
Editor at large Muhammad Cohen also blogs for Forbes on gaming throughout Asia and wrote Hong Kong On Air, a novel set during the 1997 handover about TV news, love, betrayal, high finance and cheap lingerie.