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It's Revolutionary

Innovative ideas are the things that move us forward in life, in business and in inspiration.

It’s Revolutionary

When I hear a new idea, something that hadn’t been considered before, I always smile because I appreciate the “out-of-the-box” thinking that produces that idea. And innovative ideas are the things that move us forward in life, in business and in inspiration.

At the end of last year, there were two watershed moments that made me sit up and take notice of something that hadn’t been done before.

The first one was an announcement by Penn National Gaming that it was going to split into two separate companies. One company would hold the property that is the company’s casinos. The other company will be the operator of those casinos. This is a fairly broad statement, because there are a couple of exceptions under the Penn umbrella, but basically, that is what is happening.

Now, this isn’t strictly a new idea. Hotel companies have used this model for decades in what is called a “real estate investment trust” (REIT). I had a crash course on this structure in the late 1990s when Starwood Hotels was the surprise winner in the purchase of Caesars World from ITT. The hotel company, home to such brands as Sheraton and Westin, operated under the same formula as Penn is outlining. Well, Starwood came and went from the casino industry rather quickly, and the REIT concept was forgotten until Penn revived it last month.

There clearly is a disconnect by investors with the casino and the hotel industries. Hotel companies are valued at a higher rate for some reason, and casino companies are assigned lower values, maybe because of the higher risks; I’m not sure.

But Penn Chairman Peter Carlino says the new arrangement will mean a lower cost of capital and create other efficiencies and tax advantages not possible under one company. There was a time, just a few years ago—the good old days—when much of the value of a casino company was the real estate upon which the casinos were built. Of course, the real estate industry experienced even a more precipitous drop than casinos did in the intervening years, but now it’s coming back, which makes this Penn model so attractive.

Can other companies copy the Penn model? Analysts are split about whether it would work for many other organizations, but the industry needed a new idea the capture the attention of Wall Street, and Penn National accomplished that. Good for them.

The other incident that sparked my attention is the proposed purchase of the Atlantic Club, the former Atlantic City Hilton, by PokerStars. Now, no one in his right mind is going to buy into Atlantic City at this point—with apologies to Tilman Fertitta and his purchase of the former Trump Marina, now the Golden Nugget, which seems to be working. But PokerStars has an ulterior motive.

New Jersey is very close to becoming the third state to legalize online gaming/poker, following Delaware and Nevada. And since New Jersey will only approve online casino licenses for the existing Atlantic City casinos, it only makes sense for PokerStars to buy the Atlantic Club, and at a bargain price at that, less than $50 million, according to reports.

If PokerStars receives a New Jersey gaming license—and that’s a big “if”—the company would be in position to dominate the state market and whatever extensions would come from that. Most experts believe that, in a state-by-state legalization scenario, interstate compacts will be struck, just like the big lottery games such as PowerBall, pooling large amounts of players. In this way, PokerStars can duplicate its success around the world in the U.S.

But there is that big “if.” New Jersey has the reputation of being the toughest state when it comes to licensing. The state was poised to strip MGM Resorts of its license for its relationship with Pansy Ho, the daughter of Macau gambling magnate Stanley Ho, because the Division of Gaming Enforcement contends the father dabbled in Chinese organized crime in his youth, if not today, when MGM agreed to withdraw. So how will they deal with a company that flaunted U.S. law by accepting bets after the passage of the Unlawful Internet Gaming Enforcement Act in 2006? Yes, PokerStars settled that issue with the U.S. Department of Justice, but the DGE is a little pickier. We’ll see how this plays out.

So I give PokerStars big kudos for coming up with this idea, and I really hope it works, because it will give some struggling casinos both in Atlantic City and in Nevada a new lease on life. But even if it doesn’t, there was a moment there when it made me smile.

Roger Gros is publisher of Global Gaming Business, the industry's leading gaming trade publication, and all its related publications. Prior to joining Global Gaming Business, Gros was president of Inlet Communications, an independent consulting firm. He was vice president of Casino Journal Publishing Group from 1984-2000, and held virtually every editorial title during his tenure. Gros was editor of Casino Journal, the National Gaming Summary and the Atlantic City Insider, and was the founding editor of Casino Player magazine. He was a co-founder of the American Gaming Summit and the Southern Gaming Summit conferences and trade shows. He is the author of the best-selling book, How to Win at Casino Gambling (Carlton Books, 1995), now in its fourth edition. Gros was named "Businessman of the Year" for 1998 by the Greater Atlantic City Chamber of Commerce, and received the Lifetime Achievement Award from the American Gaming Association in 2012.

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