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Analysts Applaud Shakeup at Las Vegas Casino Giant

20 November 2002

by Liz Benston

LAS VEGAS -- Stock analysts reacted favorably to Tuesday's departure of Park Place Entertainment Corp. chief executive Tom Gallagher, saying his successor has the experience needed to improve operating efficiency at the company.

Gallagher resigned as chief executive and from the Park Place board under pressure amid concerns about the company's slumping stock and disappointing earnings. He will be replaced by Wallace Barr, Park Place's chief operating officer, effective immediately.

Gallagher also is expected to resign his position as chairman of the Nevada Resort Association, the casino industry's top lobbying group in Nevada. A replacement for Barr is under consideration, Park Place spokesman Robert Stewart said.

Stewart declined to comment further. A call to Gallagher was referred to Stewart, who said Gallagher was not available. Barr also was unavailable for comment.

The company's board of directors made the decision at a meeting in Atlantic City Tuesday.

Analysts said the move doesn't appear to signal a change in direction. Some said it marks a positive step for a company that has suffered from the lack of a clear, long-term strategy.

Barr has more than 20 years of experience in the gaming industry and has served most of those years at Park Place. He is expected to continue the execution of several plans initiated by Gallagher, including a goal of cutting $100 million in operating costs next year. Barr is also expected to add to Park Place's entertainment offerings as well as its food and beverage lineup, analysts said.

"(T)he board felt that having someone with more operations experience in the CEO role would get more buy-in from the company's 28 properties for existing initiatives such as cost-cutting, marketing programs, (Park Place's) player card program, etc.," UBS Warburg analyst Robin Farley wrote in a research note Tuesday.

"Mr. Barr's operating background and reputation in the industry should enable him to leverage this strong portfolio of brands," noted CIBC World Markets analyst William Schmitt in a separate note to investors Tuesday.

New leadership may not be enough by itself to improve returns at the company, which is suffering from lackluster profits at its Caesars Palace casino on the Las Vegas Strip as well as a challenging environment in the recovering Las Vegas market, analysts said.

The company also faces new competition on the East Coast. The $1 billion luxury Borgata casino -- a project of MGM MIRAGE and Boyd Gaming Corp. -- in addition to the expansion of gaming across the northeast presents a significant challenge for Park Place, which derives a big chunk of its cash flow from its three Atlantic City casinos, analysts said.

Park Place stock has slid more than 40 percent since Gallagher's swift appointment to CEO upon the sudden death of Arthur Goldberg in October 2000.

By comparison, the shares of other major Las Vegas casino companies have appreciated significantly or remained fairly flat. The Standard & Poor's 500 has fallen about 35 percent and the Dow Jones Industrial Average has fallen about 16 percent during the same period.

Last month, shares of Park Place tumbled after the company warned investors that weak results at its Caesars Palace casino in Las Vegas -- as well as the effect of an energy contract loss and recent storm damage in the South -- would result in lower third quarter earnings.

Besides financial troubles, Park Place -- known as the world's largest gaming company in terms of revenues -- is struggling under its own weight, observers said.

"There's a real difficulty in merging similarly sized companies ... that have quite different corporate cultures," said Bill Eadington, director of the Institute for the Study of Gambling and Commercial Gaming at the University of Nevada, Reno.

By contrast, Harrah's Entertainment Inc. has effectively absorbed much smaller companies that have more easily adopted the Harrah's brand, he said.

Goldberg presided over the recent genesis of Park Place from its origin as four public companies. In 1998, Hilton Hotels Corp. spun off its gaming unit, which had previously acquired Bally Entertainment. The spinoff was rechristened as Park Place and simultaneously acquired Grand Casinos Inc. The company acquired Caesars World Inc. in 1999, including its flagship Caesars Palace in Las Vegas, arguably the most recognized casino brand in the world.

In response to shareholder concerns, Gallagher has repeatedly argued that the company's relatively low share price is in part a result of the dilutive effect of the combined companies' outstanding shares.

Investors have remained unimpressed. Even the Colosseum, a replica of the famed Roman landmark that will debut next year in front of Caesars Palace with a show by celebrated artist Celine Dion, has been called a big gamble by some company watchers.

Analysts have generally applauded the project as an upgrade that could boost the fortunes of Caesars Palace, which has lost some of its status and high-roller business to newer megaresorts in recent years. Still, construction of the theater has already disrupted traffic into the casino, significantly hurting profits.

The company also lost a hard-driving leader in Goldberg, whose gruff personality was offset by an aura of confidence and direction, Eadington said.

That direction appeared to falter as the company lost premium gamblers from Caesars Palace and then shelved plans to build a hotel tower at the property after Sept. 11 last year, he said. The company has also failed to market the Las Vegas Hilton as a premium brand, he added.

Gallagher, Hilton's former executive vice president and general counsel, was considered somewhat of an unusual choice given his lack of operations experience. Yet he has a long track record in the gaming industry, serving as president of Merv Griffin's hotel, casino and media conglomerate before jumping to Hilton in 1997.

Stephen Bollenbach, chairman of Park Place and chief executive of Hilton Hotels, has had a hand in the appointment of his former colleague as well as his sudden departure. Some saw Gallagher's appointment as a power play by Hilton Hotels to exert more influence over Park Place. In addition to Bollenbach, Hilton Chairman Barron Hilton and Hilton board member A. Steven Crown also serve on Park Place's board.

Hilton, which exited the gaming business when it spun off Park Place, isn't trying to influence the casino empire, Bollenbach has said. There's little crossover between the gaming and hotel industries, he has said.

Bollenbach gave Gallagher kudos for stabilizing the company during a difficult period.

"As a result of Tom's stewardship, Park Place is financially strong and well-positioned to compete going forward," Bollenbach said in a statement Tuesday. "We thank Tom for his dedication."

Casino stocks were mixed this morning amid thin gains across broader market indexes. Park Place stock fell slightly in afternoon trading today, to about $7.70. The company was worth nearly $13 per share the day of Gallagher's appointment.

By comparison, Harrah's stock has climbed by more than 50 percent during the period and shares of Mandalay Resort Group have increased more than 20 percent. Shares of MGM Mirage have remained fairly flat.

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