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Will Starwood keep Caesars?

by Sally J. Taylor, with The Associated Press

Starwood Hotels & Resorts is expected today to officially take control of ITT Corp.’s holdings, including Caesars Tahoe.

The $14.6 billion takeover creates the world’s largest hotelier, Starwood executives said prior to getting approval for the transaction on Thursday from the state Gaming Control Board and its parent Gaming Commission.

Included in the acquisition is Starwood’s first venture into gaming with Caesars Palace and the Desert Inn in Las Vegas and Caesars Tahoe at Lake Tahoe.

“The question now is whether or not Starwood will continue to own the casino component,” said gaming consultant and economics professor Bill Eadington, the head of the University of Nevada, Reno’s Institute for the Study of Gambling and Commercial Gaming. “And if they are interested in disposing of Caesars, who will be on the buying side.”

Because Caesars Palace in Las Vegas is currently surrounded by Mirage properties, Eadington considers that company a likely candidate even though its CEO Steve Wynn, who owns a vacation home in Incline Village, has stated he does not want to own a casino where he recreates.

A Mirage acquisition of Caesars Palace would give Mirage five casinos in a row on the Las Vegas Strip, Eadington said.

“Lake Tahoe and Reno are not where the action is,” Eadington said. “A lot of corporate decisions are based on the implications to (the Las Vegas) market.”

The marriage of ITT and Starwood creates an empire of 650 resorts and casinos worldwide with $10 billion in annual revenue.

The Phoenix-based Starwood, which beat out Hilton Hotels to take over ITT, now owns and operates properties under 23 names, including Caesars, Sheraton, Westin, Ritz-Carlton, Doubletree, Hilton, Marriott and Wyndham.

Caesars was the most recognizable casino brand in the world in 1994 when acquired by ITT, Eadington said. “ITT didn’t take advantage of that. Starwood seems to be one more step removed.”

While admittedly speculating about Caesars’ future, Eadington said his “suspicion is that (Starwood) is not going to be a casino player in the long run.”

Starwood chairman and chief executive Barry Sternlicht told the state Gaming Commission that the Desert Inn is already being marketed for sale following its recent, costly renovation.

And chief financial officer Ron Brown said a $1.95 billion sale of another Starwood asset, World Directories, closed Thursday.

Regulators were told proceeds from the sale and a proposed $650 million bond issue would be used to reduce Starwood’s $7.5 billion debt, and a $5 billion refinancing is in the works.

More than 300 real estate investment trusts, or REITs, operate nationwide, and many trade on major stock exchanges. Some own mortgages instead of property; others own both.

Starwood’s structure is unique in that it’s the only hotel REIT that’s allowed to manage the hotels it buys, thanks to a grandfather clause in regulations imposed years ago.

Starwood consists of two separate entities: Starwood Hotels & Resorts Trust, a real estate investment trust that buys and owns hotel properties, and Starwood Hotels & Resorts Worldwide Inc., a hotel operating and management company.

Sternlicht built Starwood from the ruins of a bankrupt California hotel investment firm in 1995 using an arcane tax loophole to stimulate Wall Street’s interest in the company.

Starwood capped its seemingly overnight success by purchasing Westin Hotels & Resorts for $1.8 billion and then capturing ITT. The ITT deal was first priced at $10.6 billion but Starwood now puts the price at about $14.6 billion, including cash, stock and assumed debt.

The REIT phenomenon has created tax opportunities that are the driving force behind non-casino companies acquiring casinos including the proposed purchase of Harveys Casino Resorts by real estate investment firm Colony Capital.

Harveys, which only consists of hotel/casino properties, is a “very clean acquisition,” said UNR’s Eadington, compared to ITT whose properties are more mixed.

“There’s far less risk in Harveys being disrupted in this than Caesars,” he said.

Tahoe Daily Tribune E-mail: tribune@tahoe.com

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