HARRAH'S FACES MORE BARRIERS TO JOINT VENTURE IN

C O N F I D E N T I A L LJUBLJANA 000731 SIPDIS SIPDIS E.O. 12958: DECL: 11/29/2017 TAGS: ECON EINV ETRD SI SUBJECT: HARRAH'S FACES MORE BARRIERS TO JOINT VENTURE IN SLOVENIA REF: LJUBLJANA 416 Classified By: CDA Maryruth Coleman for reasons 1.4 (b) and (d) -------------- Summary -------------- ¶1. (C) Continued local opposition to the proposed Harrah's/Hit joint venture threatens to derail the project altogether, although Harrah's Entertainment has gained the support of key Slovenian officials and economists. Although the Government of Slovenia, th government-owned Slovenian casino company Hit, and Harrah's Entertainment signed a second letter of intent in June 2007, Hit -- always a reluctant partner -- is now advocating for a new set of agreements that basically nullifies the 2007 letter of intent. President of Hit Niko Trost told Charge November 15 that Harrah's would have to address at least four issues in order for Hit and the local community to support the joint venture. Meanwhile, local opposition to the deal seems to be growing and formalizing. Some local residents have suggested that Trost, never a strong public proponent of the deal, might actually be rallying some of the local opposition. End Summary. -------------- Hit Trying to Back Out of the Deal? -------------- ¶2. (C) During the Charge's November 15 visit to Nova Gorica in the west, the site of the proposed entertainment center, the president of Slovenian gaming company Hit, Niko Trost, expressed his doubts about the progress of the joint venture. Trost claimed that the deal, as is, would not pass muster with the local community. (Note. During Harrah's Vice President Jan Jones' September visit to Slovenia, she received positive press on Harrah's plans for Slovenia and Jones seemed to impress many of the local leaders during a town hall meeting in Nova Gorica. End Note.) Trost argued that the 2007 letter of intent does not show "real and true partnership." Trost told Charge that Harrah's would need to change four fundamental aspects of the current agreement in order for the deal to go forward. He said Hit seeks a more equitable power sharing structure, a simplified ownership structure, increase in hotel size, and confirmation of new gaming legislation. (Comment. At least three of these would potentially dissolve the project. End comment.) Trost's New Demands -------------- ¶3. (C) Trost complained that Hit and Harrah's are equal partners in this deal, yet Hit has not had equal say on the details of the deal (ref A). Trost, local mayors and local community leaders believe that they were wrongly left out during initial negotiations between the Government of Slovenia and Harrah's. (Note. The GOS and Harrah's negotiated new gaming legislation that would give Harrah's the tax and ownership structures it needed for viable investment in Slovenia. Hit worries that this could possibly be an unfair advantage for Harrah's in the future. End Note.) ¶4. (C) A second trouble spot is Trost's desire to revisit the ownership structure of the deal. The current letter of intent is too complicated and opaque, according to Trost. The 2007 letter of intent creates one primary company and two subsidiary companies. Trost is concerned that although Hit would own 51% of the main company and Harrah's would own 51% of the subsidiary companies that Harrah's would still be the decision-maker in the partnership. He proposes an "equal partnership," but did not reveal to Charge what that would be. (Note. The 2007 letter of intent has a "complex" ownership structure because the GOS would not budge on owning the majority share of the joint venture but Harrah's negotiators refused to invest one billion dollars without management control. End note.) ¶5. (C) A difference remains between the two partners on the size of the venture. Trost emphasized that the new entertainment center must be a more "European" resort. The crux of this argument rests on the number of rooms. The Hit management is absolutely fixated on the need for at least a 2,000-room hotel suggesting that fewer rooms would make it "just another casino" and cannibalize from the current Hit casinos in the area. Harrah's, partially responding to local questions about the need for so many rooms, proposed a 1,000-room hotel. Harrah's explained that as the entertainment center grows, Harrah's or other companies can establish new hotels. ¶6. (C) According to Trost, Harrah's and Hit should not sign any additional agreements until the new gaming legislation is adopted by the Slovenian parliament. The GOS submitted the new legislation in September, but parliament has yet to debate it and adoption of the new legislation remains uncertain. (Note. Jones met with several coalition and opposition parliamentarians to discuss the benefits of the joint venture and the necessity for the new gaming legislation. Afterwards, in September 2007, parliamentarians from the Social Democrats (SD),Slovenian Democratic party (SDS),People's party (SLS) publicly came out in support of the project. The main opposition was from the coalition party New Slovenia (NSi),which is strong aligned with the Catholic church. The Catholic church has gone on record stating it fears the deal will increase "social evils"; it has been organizing the local community and hosting town hall meetings. Prime Minister Janez Jansa told COM Robertson during a meeting in August that it was crucial to build support in parliament for the new gaming legislation in the fall since a majority vote is necessary to implement the new gaming law. End note.) ¶7. (SBU) Trost said he had informed Jones during her September visit that Harrah's should respond to these four concerns on Harrah's next visit to Slovenia. Trost said that Jones planned to come to Slovenia some time in November but no set time had been established yet. Trost Losing Credibility? -------------- ¶8. (C) Jansa criticized Trost publicly in July 2007 for managing the launch of the joint venture so poorly, and subsequently not moving the joint venture forward. According to a November 28 article in the Slovenian daily Finance, the president of Hit's trade union Marko Slivnik threatened a workers strike, alleging that the on-going bad relationship between Trost and Hit management board member Jana Grbec was adversely affecting Hit employees. Finance speculated that Trost might be losing support in both the supervisory and management board. Supervisory board chairman Viktor Baraga denied any knowledge of internal problems. (Note. Stories about troubles among the Hit board have surfaced in the press frequently since July. During a meeting with DCM August 3, Jana Grbec expressed concern that Trost is not working harder to help the deal succeed. End note.) -------------- Local Opposition Organizing -------------- ¶9. (C) Dr. Karl Bonutti, former Slovene Honorary Consul to the U.S. and resident of Nova Gorica, told Charge November 15 that he believes the Hit/Harrah's proposal is an excellent project for the region, but he, too, is pessimistic about the joint venture succeeding. He opined that Hit and the local community are against the project because they fear that Harrah's will hire non-Slovenes to staff the entertainment center and that the Slovene workers and the Hit management will eventually get squeezed out. He also suggested that many smaller casino owners are interested in buying Hit when the GOS finally sells its shares and they are afraid that a Hit/Harrah's joint venture would block their ambitions. (Note. Hit is the primary employer in Nova Gorica and there is no significant foreign capital in the region. End note) -------------- Comment -------------- ¶10. Hit and Harrah's only signed the 2007 letter of intent after all night negotiations. Trost should be aware that any demand for significant changes would likely be a deal breaker. During the two-year negotiations between the Government of Slovenia and Harrah's, Slovenians seem to have forgotten that Slovenian government officials invited Harrah's in 2004 to invest in Slovenia. Slovenia has had a steady decline in Foreign Direct Investment since 2004 and the GOS seems to have stepped back from promoting FDI. Although Jansa and the national government have been in the background pushing for this deal to move forward, given the upcoming parliamentary election in fall 2008, Jansa and other politicians would likely not force a deal upon an unwilling local community. In this stalemate, those opposed to the deal are increasingly taking the initiative while the supporters are maintaining a low profile. End Comment. COLEMAN