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Playing the Percentages

With Chicago possibly in play and Wynn Encore up in the air, don’t be surprised to some changes in ownership and direction.

Playing the Percentages

As of this writing, Illinois has jolted the gaming world by passing the broadest expansion since Nevada legalized casinos in 1931.

The immediate reaction was twofold: one, that slot machine companies will be the biggest beneficiaries, with upwards of 35,000 games being added; and two, that casino companies will be hurt because the pie will be sliced into smaller pieces.

Jefferies equity analyst David Katz summed up the reaction this way: “Slots don’t create revenue, people do.”

At this point, it’s difficult to tell how everything will play out, but Illinois officials may be as disappointed with the tax revenues now as they were years ago, when they taxed casinos to a point of diminishing returns.

They might find that investors aren’t willing to commit significant money to new development if the prospects of success are iffy. If they want an example, they can look at Pennsylvania, where a much smaller expansion—adding satellite casinos—is basically a dud.

The biggest opportunity is Chicago.

A few years ago, having the lone casino in the Windy City would have drawn all the major operators. That might still be the case. Perhaps the best positioned company is Las Vegas Sands. LVS has the financial wherewithal and isn’t facing distractions like Wynn Resorts has endured. It isn’t under pressure from activist investors to produce results from current assets, as are MGM and Caesars.

In addition to the big Las Vegas-based operators, bidders could come from elsewhere, such as Hard Rock International or investors in partnership with the big operators.


MGM and Wynn

Perhaps a case of how activist investors can affect growth plans is MGM’s decision not to buy Encore Boston Harbor.

The activists have spurred MGM to appoint a special committee to discover how it can best profit from its existing real estate. Spending $3 billion or so for another casino probably isn’t what they have in mind. MGM might have hinted at that when the company said the prospective acquisition raised anxiety among some stakeholders.

As a result, MGM management can get back to the business of improving the profitability of their business.

But the same might not be the case on the Las Vegas Strip at the headquarters of Wynn Resorts.

I’m reminded of a conversation I had years ago with a guy who was in on the financing of the Rio. He said he expected it to be sold. The reason: according to this guy, then-CEO Tony Marnell thought of selling the property and when that idea takes hold, it usually doesn’t go away. Several months later, the Rio was sold to Harrah’s.

It won’t be a surprise if Wynn finds a buyer for its Boston property.

Strategically, Boston doesn’t fit. Wynn, after all, is an Asian company with a Las Vegas presence. It gets 80 percent of its EBITDA from Macau and much of its Las Vegas gaming revenue from Asian players. Wynn will become even more of an Asian company if it gets a Japanese casino license. Having one regional casino makes Boston an outlier. Even the company’s reported interest in buying Crown Resorts in Australia (now in Melco CEO Lawrence Ho’s sights) would have made more sense, as Wynn would get the luxury Barangaroo casino in Sydney that’s being built for Asian VIPs.

Wynn’s executives may want to get rid of the aggravation in Massachusetts and get back to their core business of destination resort casinos.

The question then: Who can plunk down $3 billion to buy Boston? Not Caesars. Nor the regional operators, Penn National, Boyd or Eldorado. Some could speculate Mohegan Sun, though Massachusetts regulators might not be delighted to have their neighboring competitor in the Bay State.

One possibility is Genting. The company has a history in New England, having helped finance Mohegan Sun and more recently lending money to the Mashpee Wampanoag Indians to build a casino in, of all places, Massachusetts.

For Genting, Boston wouldn’t be as much of an outlier. The company has Resorts World in New York City. Kien Huat, the real estate arm of the Lim family that controls Genting, controls Empire Resorts, which owns Resorts World Catskills. Additionally, the Northeast region can feed players into Resorts World Las Vegas now under construction.

Another possibility to speculate is Galaxy Entertainment, the Hong Kong-listed Macau casino operator that already owns 5 percent of Wynn.

Galaxy could buy Wynn for its Las Vegas properties and sell the Macau casinos. That could satisfy those who want to see new blood in Macau, and especially Asian blood, among the six casino concession holders.

Of course, Wynn could, as the company says, commit itself to running Encore Boston and add steady profits to the corporate coffers.


Dividends and REITs

With investors getting nervous that the next recession may be near, it’s time to look at defensive stocks.

In gaming, that includes the three real estate investment trusts (REITs). They provide good dividends and have the protection of rents that should keep coming in even if the economy slips (but doesn’t crash). In an era of consolidation, REITs can continue to grow their tenant bases, which means more rent to pay higher dividends and more profits to boost stock prices. In other words, REITs can combine safety, growth and total return.

Here are their dividend yields:

Gaming & Leisure Properties   6.9 percent

MGM Growth Properties          6.1 percent

VICI Properties                           5.2 percent

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