New Jersey eyes labor issues at sponsor-backed Palms Casino

  • TPG, Leonard Green casino outsources 200 food and beverage positions
  • Nightlife hotspot Palms refocuses efforts on rooms, slots
  • Casino pays $1 million fine in 2013 scandal

Longtime TPG limited partner New Jersey State Investment Council is considering ways to respond to labor concerns with the firm’s investment in Palms Casino Resort.

TPG’s special situations platform holds a 49 percent stake in the Palms, which in August announced plans to outsource approximately 200 food and beverage positions to Sodexo, a French food services company. The Palms ownership group also includes Leonard Green & Partners, which owns another 49 percent of the hotel and casino.

The Palms disclosed its plan to outsource a segment of its workforce two months after a group of employees notified the casino’s management of its intention to hold a vote to unionize under Culinary Workers Union Local 226. Local 226, an affiliate of national labor organization Unite Here, represents approximately 55,000 workers in Las Vegas and Reno.

The employees also requested management acquiesce to a “neutrality agreement” that would prevent the Palms from presenting counter-arguments to unionization.

Palms President and CEO Todd Greenberg said the decision to outsource certain food and beverage positions had nothing to do with the unionization effort. The positions include those at two restaurants that were losing “a few million dollars per year,” he said in an interview.

“In no way was this in response to the organizing effort. That wouldn’t be acceptable and that wouldn’t be how we’d handle that,” said Greenberg, adding the Palms began discussing outsourcing positions to third parties two to three months before it received employees’ petition to organize. “We’re very proud, not only of how we treat our team members, but we’re also proud of respecting their right to seek collective bargaining under the rules of the NLRB [National Labor Relations Board].”

Respecting the right to collectively bargain doesn’t mean management supports the union’s effort, however. Greenberg said he prefers Palms management have a direct relationship with its employees.

Outsourcing positions would reduce annual losses at the Palms by “a few million dollars” while staving off layoffs, Greenberg said. Each of the 154 employees who lost their jobs in the outsourcing and re-applied for positions with Sodexo received offers at wages equal or superior to what they earned as Palms employees, he said. Those who didn’t reapply were eligible for severance.

Even so, transitioning those employees to Sodexo shuttles a quarter to a third of the employees behind Local 226’s unionization effort to a new entity, said Alyssa Giachino of Unite Here. Outsourcing positions created a stumbling block in Local 226’s ongoing effort to organize the Palms.

After Palms announced its plans to outsource positions to Sodexo, the union began engaging with TPG investors to put pressure on the firm and Palms management to accept the neutrality agreement. The union made a presentation at New Jersey’s September 23 State Investment Council meeting.

Comments from Unite Here organizer Jim Kane, Palms employee Jose Turcios and Las Vegas Pastor Willie Cherry unfavorably compared labor relations at the Palms to that of another casino, the Cosmopolitan of Las Vegas, which Blackstone Group acquired in 2014. In February, Local 226 toasted the Cosmopolitan’s new ownership group for retaining all of the existing employees and repairing the casino’s relationship with organized labor.

“Every other unionized casino has gone through the same process that workers are seeking at the Palms,” Giachino told Buyouts. “We have been much happier with Blackstone’s approach, which we believe is pretty pragmatic.”

Pension investment staff reviewed the information and remarks presented at the September meeting and “notified TPG on the matter,” New Jersey spokesman Christopher Santarelli said in an email. The State Investment Council is still preparing a formal response.

“My understanding is that the staff would look into the factual situation before we did anything, rather than jump the gun,” said SIC Chairman and Byrne Asset Management founder Tom Byrne, commenting on the Palms. “I don’t think our role is to interfere with the day-to-day running of business.”

TPG declined to comment.

Tough times in Las Vegas

The combination of strict oversight, an unsteady economy and a strong presence from organized labor complicated private equity’s involvement in Las Vegas casinos through the last half-decade, sources told Buyouts.

The gaming industry is heavily regulated, particularly in Nevada, and a surge of private equity investment in casinos between 2007 and 2013 coincided with a severe economic downturn. The financial crisis caused Nevada casinos’ revenue to dip below $10.5 billion in 2009 and 2010, down more than $2 billion from 2007’s pre-crisis high of $12.85 billion, according to the University of Nevada, Las Vegas’ Center for Gaming Research.

Private equity firms “have to become familiar with the rigorous compliance standards that are applied to all gaming entities,” said one Las Vegas attorney who requested anonymity because of client concerns. “It’s a very good litmus test for PE, because the guys who try to come in and make a quick buck and leave, they realize that gaming is not the industry for that.”

Organized labor’s strong presence in Nevada casinos also adds a degree of difficulty, particularly when unions draw on pro-labor officials at public institutions for support. In 2013, Oregon Treasurer Ted Wheeler — whose office oversees the state’s pension — requested TPG “treat employees fairly” in portfolio company Caesars Entertainment’s negotiations with Local 226. Caesars’ operating unit later declared bankruptcy in early 2015, weighed down by a debt burden it took on when it was acquired by TPG and Apollo Global Management in a $30.7 billion buyout in 2008.

While organized labor seeks similar LP support for its efforts at the Palms, TPG’s and Leonard Green’s approach to acquire the hotel and casino differs considerably from the one taken with Caesars. Rather than loading the Palms with leverage via a traditional buyout, the firms’ 2011 deal for a 98 percent stake in the Palms essentially freed the company of its debt, founder George Maloof told Vegas Inc. Maloof retained a 2 percent stake in the business.

Maloof opened the Palms in 2001. Located approximately a mile off the vaunted Las Vegas strip, the former Sacramento Kings owner attracted customers to his new property by investing heavily in nightclubs and entertainment. Its grand opening attracted celebrities like Dennis Rodman, Paris Hilton and Cuba Gooding, Jr., and the hotel later played host to a season of MTV’s “The Real World” in 2002.

By 2011, however, other high-profile nightclubs opened properties on the Las Vegas strip. The Palms’ share of the nightlife market diminished, and the property was roughly $400 million in debt.

The investment from TPG’s special situations platform and Leonard Green marked the start of a turnaround, though the early years proved somewhat rocky.

Less than two years into the investment, the Nevada Gaming Commission and Las Vegas Metropolitan Police Department fined FP Holdings — the holding company managed by TPG and Leonard Green — a little more than $1 million for charges relating to prostitution and drug dealing at the Palms. The $1 million settlement required the Palms to admit to each and every allegation set forth in the complaint, and to waive its right to a public hearing on the charges.

“Obviously there was a lot of soul searching there. That’s the last thing a PE firm wants to get involved in. And there were a lot of changes made,” said one private equity executive with knowledge of the deal, who spoke on the condition of anonymity. “It’s not like the casino was condoning it by any stretch.”

Former Palms CEO Joseph Magliarditi stepped down in October 2013, nine months after the ownership group agreed to a settlement. His replacement, Daniel Lee, resigned less than a year later “to pursue other business opportunities” after suffering a bicycle accident, The Las Vegas Review-Journal reported.

The turnover in management corresponded with an adjustment in TPG’s and Leonard Green’s strategy for the property. The Palms shuttered some of its nightclubs, including Moon, which was at the center of several of the drug and prostitution-related counts brought by the Gaming Commission.

“We had to make some changes and we also had to look at what our customers wanted, and make sure we were meeting the needs of our customers,” said Greenberg. The casino began focusing on core businesses like slot machines and hotel rooms, which brought the Palms more in line with what Greenberg considers a “mainstream experience” for customers.

Despite the challenges, sources with knowledge of the deal consider it fairly successful. The development of Las Vegas City Center and Cosmopolitan, which are among the Las Vegas strip properties closest to the Palms, led “a lot of the market to come our way,” one source said.

“We’ve had to make sure that we manage that correctly, and stay relevant with our customers,” said Greenberg. “I think that Leonard Green and TPG, whenever we’ve had to make any changes, have always been great about us doing the right thing.”