Is Rand Araskog Rolling The Right Dice?

Set back from the bustling Las Vegas Strip, Caesars Palace takes care not to present itself as a joint for the nickel-slot crowd. Its main hall gleams with rows of baccarat tables, where the ante can soar to $25,000. Big spenders can luxuriate in the Pompeii Suite, replete with sauna and a sound show simulating a volcanic eruption.

Sure enough, Caesars has found itself a high roller--ITT Corp., which announced last month it would pay $1.7 billion for its Caesars World Inc. parent. The acquisition is the centerpiece of ITT's bid to create an entertainment-and-gambling powerhouse. It follows the company's August agreement to buy half of Madison Square Garden Corp. and its sports teams, as well as a flurry of financial-subsidiary sales that together will raise $3.5 billion this year to help finance the new strategy.

ODD DUCK. The frenzied dealmaking represents a striking coda for ITT Chairman Rand V. Araskog, who, after 15 years of dismantling much of his company's sprawling conglomerate, is set to retire in 1996. But his entry into gambling has been startlingly expensive and risky. Caesars, known in the industry for stodgy management and a risk-averse strategy, may well be the wrong engine to power ITT's ambitions.

Caesars is an odd duck in the casino crowd: While gambling has moved rapidly toward bigger hotels and family-oriented entertainment, Caesars has stuck to its pursuit of big-time bettors. That's one reason profits have slumped, to pretax margins of 14% in the fiscal year ended July 31: By comparison, margins at Mirage Resorts, which caters to a middle-market crowd, hover around 24%. Indeed, before news of ITT's purchase, Caesars traded at a sharp discount to most of its rivals.

For this, according to Securities & Exchange Commission filings, Araskog raised an initial offer of $60 a share to $67.50--when Caesars stock was trading at only $45. Why? Because he couldn't break into gambling any other way. ITT has struggled for years to join Vegas innkeepers, buying a small parcel in 1989 and three years later taking an 11.5% stake in Bally's Grand. It sold that interest in 1993 and paid $160 million to buy the faded Desert Inn.

ITT had planned to build a $750 million, 3,500-room hotel and resort alongside the Desert Inn. But costs skyrocketed, and soon, it began eyeing Caesars instead. Caesars and ITT officials, including Araskog, won't comment. But analysts and competitors say ITT saw Caesars Palace, with its three casinos and a management team in place, as a quicker, cheaper entree into gambling. Araskog's plan: to give Caesars the firepower

of the reservations system of Sheraton Hotels, another ITT holding.

The problem: These businesses don't attract the same customer. Caesars is upmarket, but the majority of Sheraton's 450 mostly moderately priced lodgings play more to the middle market. "Ideally, you don't want a Sheraton customer staying at Caesars," says Montgomery Securities analyst Michael G. Mueller.

EGO CLASH. Caesars management, moreover, has never played the expansion game that would benefit Sheraton. Indeed, Caesars has bided its time sprucing up the 1,500-room Palace--while Vegas has mushroomed with the addition of three megaresorts of 2,500 rooms or more apiece. Caesars Chairman Henry Gluck, who agreed to stay on at ITT for five years, has argued that Caesars should protect its niche rather than build low-priced rooms. "They've got a solid management team, but Caesars has never been in a growth mode," says a rival.

Caesars does have a modest expansion in the works, and ITT, with $1.2 billion in cash on Sept. 30, can foot the bills. More important, analysts say, Araskog has a keen personal interest in making the deal work. Beyond his substantial wealth tied to ITT's stock, they believe he is creating an entertainment vehicle he can spin off and run unfettered when retiring at 65 next year.

Still unclear, though, is whether Araskog and Gluck can exist under one roof. Two years ago, former Hilton top gaming executive John V. Giovenco lasted just five months at ITT after disagreeing with Araskog over casino policy. Now, Gluck may be asked to change his style as well. It could be a hefty wager for a company that has always enjoyed playing it safe.

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