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Growth is Back

Borrowing, consolidating and expanding are back in style in the gaming business

Growth is Back

When Wynn Resorts reported that it had hired MGM Resorts executive Gamal Aziz to head a new development subsidiary, it was sending a message: Growth is back.

After a half-decade of modest development and balance sheet repair, American casino companies are positioned to grow. And, after a half-decade of caution, the animal spirits are returning, fueled by cheap debt, those stronger balance sheets, and growing confidence in the economies of Asia and North America.

The warming up has been evidenced by companies willing to borrow to expand, such as Boyd buying Peninsula Gaming and Pinnacle offering to buy Ameristar.

It also is indicated by the interest among major companies in likely metropolitan-area casino projects—MGM and Penn National outside Washington, D.C., Wynn and Caesars in Boston, all the majors in Toronto, and the push by each of the Macau operators for big new projects.

The ability of the companies to finance expansions has improved considerably. At the height of the development boom in 2007, big-cap casino operators were spending in excess of 60 percent of their net revenues on capital projects. That figure today is under 10 percent.

Wynn has been conservative about expanding, operating just two adjacent properties in Las Vegas and one in Macau with another on the way.

In fact, one of the most interesting debates occurred long-distance during their respective investor conference calls when Steve Wynn would say that “Bigger isn’t better. Better is better,” and Las Vegas Sands CEO Sheldon Adelson would counter that “Bigger is better.”

Nor does Wynn need a development subsidiary to handle current projects. Steve Wynn has been his own chief development officer in Macau, Philadelphia and Boston.

It seems clear he has more in mind. Japan might be one possibility, as that country is again seen as moving to legalize destination resort casinos.

And why leave Washington to MGM or Penn? Whoever gets a casino a stone’s throw from D.C. and its affluent suburbs will own a gold mine. As of this writing, Wynn has not expressed an interest in Washington, but the opportunity is certainly worth a look.

Then there is the asset-light model of non-casino resort development being pursued by MGM Resorts and Caesars. If the idea is that casino companies’ brands and resort expertise can be extended to non-gambling resorts, then Wynn would be the natural in that space.

Isn’t an exquisite Wynn resort just what Dubai or a neighboring emirate would die for?

But whatever Wynn has in mind, it is clear that industry growth is resuming.

Shaun Kelley of Bank of America/Merrill Lynch, for example, has pointed out that by 2017 Macau will increase the number of table games by 35 percent, slots by 52 percent and capital expenditures by 75 percent.

Though appetite for growth has revived, we doubt it will match the boomtown frenzy of Las Vegas before the Great Recession.

One difference is that casino companies are looking at big markets in which competition would be limited.

Clearly, the only casino in downtown Chicago, Toronto or Tokyo would be worth big investments.

We also suspect the next development round will be more disciplined.

Caesars’ Linq and the Bill’s Gambling Hall redo will cost less than $750 million. The conversion of Sahara into a trendy SLS also is not a multibillion-dollar affair.

Executives and investors also remain scarred by the 2008-2009 collapse, and owner/CEOs like Wynn and Adelson appear to be enjoying dividends, so they’ll want to maintain the ability to pay them.

Proliferation And

Consolidation

Pinnacle’s proposed purchase of Ameristar would further reduce the number of regional casino operators. It follows Boyd having taken out IP in Biloxi and, more recently, Peninsula Gaming.

It continues the long process of consolidation that has seen the disappearance of both public and private operators such as Argosy, Aztar, Casino Magic, Boomtown, Horseshoe, Players, Riviera Corp. and Hollywood.

But, in fact, there also has been a proliferation. That dynamic has been somewhat masked because they are mostly privately held—Landry’s Golden Nuggets, Cordish Cos., Neil Bluhm’s various properties, as examples.

In addition, some small public companies have become multi-property operators, such as Monarch Casino, Churchill Downs, MTR Gaming and Full House Resorts.

And many single-property enterprises have sprung up, such as Greenwood Racing’s Parx Casino, Valley Forge and Mt. Airy in Pennsylvania.

Indeed, the low-profile proliferation bears within it the potential for another round of consolidation. As Joel Simkins of Credit Suisse noted, there are 118 privately held commercial gaming assets in the U.S. vs. 139 operated by public companies. That’s a lot of potential for consolidation.

For gaming suppliers, the proliferation has happened and the time for consolidation is arriving.

There has been a rush of new, or newly ambitious, competitors. We all know the names: Konami, Multimedia Games, Ainsworth, Summit, American Gaming Systems, Cadillac Jack, VGT, Aruze, Incredible Games, Spielo, etc.

Other established companies are looking at entering North America: SHFL entertainment, Merkur and Novomatic among them.

But the trend cannot continue. There is simply not enough business for every company to support the kind of cost structure needed to compete across broad markets.

Thus, the recent demise of AC Slots might not be the last disappearance we see. Consolidation will come among the suppliers, one way or the other.

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