Bit of loose change could become high stakes

For Harrahs Entertainment, with a market capitalisation of $11bn, buying London Clubs International for £279.3m ($532m) amounts to loose change from a slot machine jackpot.

But the bid could represent something much more significant. With giant US casino operators such as MGM and Harrah’s running out of opportunities to expand at home, and with Macao poised to outstrip Las Vegas as the world’s biggest gambling market, US attention is now turning to growing markets such as the UK for expansion.

Nigel Parson, analyst with Evolution Securities, says the Harrah’s bid is “the start of a global game” involving large international gaming companies competing for space in newly liberalised gambling markets across Europe.

International casino operators see the UK as prime virgin territory, with its new gambling laws creating a raft of new casinos including a Las Vegas-style regional or “super” casino.

”It’s not just going to be the US coming in,” says Mr Parson.

“UK companies such as Ladbrokes and William Hill are far too big to ignore while online gaming companies such as PartyGaming will be very busy, so will Australian companies.

“There is also a huge amount to happen in Macao,” adds Mr Parsons, in reference to how the city’s casino market is not only expected to top Las Vegas but has also been attracting a considerable amount of competition of late.

Andrew Lee, analyst with Dresdner Kleinwort, says the bid is a significant because it dispels the notion that the US would be put off by UK legislation which cut the number of intended super-casinos from eight to just one.

“Despite the watered down bill and all the frustrations of the US operators at the UK having only one super-casino, this is confirmation that they are still highly interested in participating in the UK casino market,” says Mr Lee.

Harrah’s has chosen its entrance into the UK market with care. LCI has undergone a renaissance since the calamity of its failed Aladdin casino in Las Vegas, which was opened a few days before the September 11 terrorist attacks.

It sold Les Ambassadeurs, probably the most prestigious London casino, for £115m in order to reduce debt and has been active in picking up a raft of licences made available under the old casino act of 1968. It also owns a casino in South Africa and two in Cairo.

By the end of 2008, it will have 11 casinos in its UK portfolio.

Its existing ones include the Rendezvous on Park Lane, 50 in St James’s and the Golden Nugget in London’s West End.

But its new licences allow them to build casinos of up to 59,000 sq ft, which is much larger than its existing sites. The first will open in Manchester in October; its new Leicester Square casino, in the building of the old Empire Ballroom, opens next March. Others are in the works for Glasgow, Leeds and Nottingham.

Deregulation brings risks as well as opportunities: the number of casinos in the UK will more than double from 139 to up to 294. That is likely to lead to casualties and consolidation.

Mr Lee said the attraction of LCI to Harrah’s was their upmarket quality.

“Harrah’s are taking the view that there are no ‘dogs’ in LCI’s estate, no pokey back street casinos, which will clearly be vulnerable as competition heats up and the new licences roll out,” Mr Lee said. “But they are more interested in getting the new licences. If they don’t get any of the new licences then the only thing to do is to buy up the companies that get the new licences.”

Harrah’s had recently expressed interested in Gala Coral, a private UK gaming company, but Andrew Tottenham of Harrah’s said LCI represented an excellent opportunity to build an overseas platform for growth.

“There are opportunities in Europe in that there are governments looking today to increase their tourism and reviewing their gaming and gambling legislation to see if they can attract investment to create large international resorts,” Mr Tottenham said.

LCI represents a strategic European asset for Harrah’s, already active in Spain and Slovenia, while Stanley Leisure, LCI’s merger partner until Thursday’s bid, left out in the cold.

All eyes now turn to Genting, the Malaysian operator whose 29.7 per cent shareholding in LCI effectively puts the future of the deal in its hands. One person close to the deal said although Genting could well see this as an excellent price for LCI it might itself be tempted to bid for LCI, given its own international expansion desires.

Whatever hand Genting plays, many of the big international operators are likely to be sitting at the table of the UK market for some time to come.