Three of the major gaming companies in the U.S. last month were hit hard by the continuing economic slide, while posting dramatically lower earnings.
HarrahÆs Entertainment has been forced to make changes like cutting back hours for its VIP lounges and limiting the free food it used to give to high rollers. While the move has angered some players, it is just a small sign of what look like extremely large problems for the gaming giant.
The company reported a $97.6 million second-quarter loss (third quarter announcements should be forthcoming) compared to a $237.5 million profit a year earlier. It operates under more than $23 billion in debt related to the 2006 buyout involving private equity firms TPG and Apollo Management LP.
Both companies invested $1.3 billion, and were forced to write down their HarrahÆs stake by 20 percent in January 2007, just months after the buyout closed. Experts predict they will have to mark down their investment again, perhaps by as much as 75 percent.
“The leverage is so off-the-charts, and we donÆt know where the bottom is,” said Peggy Holloway, senior credit officer with MoodyÆs Investors Service.
When closing the deal, both HarrahÆs and the private-equity firms said they looked at the possibility that the market would worsen, but those close to both sides say current market conditions exceed their worst-case scenarios.
“We were planning on the business to continue to be robust,” said HarrahÆs chief executive Gary Loveman. “We were not anticipating that the world would fall into the circumstances it is in today.”
When Boyd Gaming announced it was stopping construction on Echelon earlier this year, it was expected that work would resume in 2009. During a recent earnings report, the company said 2009 will instead be used to re-evaluate the
“Our long-term strategic direction for the company is to have a significant presence on the Strip,” said CEO Keith Smith. “That is still our current view.”
The company reported its third-quarter net income was $8.7 million, down from $31.9 million a year ago.
Smith said reduced customer spending at all of its casinos is to blame.
“People are still visiting our casinos, although they are more cautious with their discretionary spending,” Smith said. “These are tough economic times, but our balance sheet remains strong, and we continue to produce significant cash flow. We are well-positioned to weather the current economic environment.”
And MGM Mirage announced last month that it is going to “maximize financial resources” by postponing two casino projects in Las Vegas and Atlantic City.
The company said the MGM Grand Atlantic City, which was scheduled to open in 2010, is being delayed.
“We continue to believe that Atlantic City represents an important market for further development,” said MGM Mirage CEO Terry Lanni. “We intend to resume development at such time as economic conditions and capital markets are sufficiently improved to enable us to go forward on a reasonable basis.”
The company also announced that a project on the Las Vegas Strip, a partnership with Kerzner International that was scheduled to start in 2009 and open in 2012, is also on hold.
The announcements came with reports that the companyÆs third-quarter net income fell 67 percent, from $183.9 million to $61.3 million.