Adam Rosenberg is a managing director and co-head of gaming investment banking at Goldman Sachs. With 10 years of experience at Goldman Sachs, Rosenberg helps direct a gaming practice that focuses on casino operators, gaming technology companies and gaming equipment manufacturers. His group has been involved in advising Texas Pacific Group in its acquisition of Harrah’s Entertainment with Apollo, financing the Elad Group and IDB in their acquisition of the New Frontier site, advising the Ethos consortium in its acquisition of South Africa’s Gold Reef Resorts, financing Las Vegas Sands in connection with all of its projects in Las Vegas, Macau and Singapore as well as running the Las Vegas Sands IPO and in many other industry transactions. Rosenberg spoke with Global Gaming Business Publisher Roger Gros at G2E in Las Vegas last November.
GGB: How is the trend toward private equity investments impacting the gaming business?
Rosenberg: The rise in interest from private equity has largely matched the positive change in the social attitude toward gaming, and the broader realization that these are legitimate businesses with very attractive operations. Dramatic growth in the private equity capital base has forced these funds to expand their investment universe as they have gradually become more comfortable with the gaming regulatory and licensing processes. At the same time, they have come to appreciate how resilient the gaming industry has been through economic cycles, how leverageable the assets that underlie these businesses can be, and how attractive gaming company valuations are relative to other asset classes.
We also had a very robust debt capital markets environment for a relatively long time period. All of those things converged to create a lot of interest in the gaming industry among the private equity community. Recent volatility in the debt capital markets poses a question mark for financing strategies in the short term, but there remains a great deal of interest over the longer term for all of the fundamental reasons just discussed.
Some of the larger public and private gaming companies—and even some smaller ones—seem to be diversifying their revenue streams away from gaming. Do you think that’s a good move?
It’s not only a good move, but a necessary one. The desire for casino companies to redefine themselves as resort companies that offer gaming as one category of their offerings, but also offer a whole host of other non-gaming amenities, is part of a broad redefinition that we see going on in the gaming sector.
On the Las Vegas Strip, for example, casino resorts generate more revenue from non-gaming sources than they do from the casinos. This has coincided with the ability to attract a broader customer base—who wants to attend conventions, dine, shop and be entertained, in addition to playing in the casinos—and an increase in the average length of stay. All of which is good for business.
The Asian market, particularly in Macau, is exploding. Is it being over-hyped now, when it comes to the valuation of the companies that are participating there?
Gaming assets tend to be valued based on multiples of cash flow. I believe that best-in-class assets in the fastest-growing markets deserve premium multiples. Some companies—like Las Vegas Sands—have large amounts of their cash flow coming from Macau, which is a very attractive, very high-growth market. Moreover, much of that cash flow is not yet in place. So, if you were to focus just on in-place cash flow, and compare that to the value of the company, the multiple might appear high relative to some other companies.
But that doesn’t mean that the valuation is too high, or inappropriate in any way. You have to recognize the fact that much of Las Vegas Sands’ cash flow is coming in the future, and that cash flow is growing very rapidly. When you adjust the valuation to account for the coming cash flow growth, then the multiples don’t look so out of line. It’s a natural consequence of the strength of the business model: Extraordinary growth deserves premium valuation.
Big changes are taking place in Atlantic City. What’s your view of this market?
To remain relevant, Atlantic City has to develop the kinds of resort, spa, shopping, dining, entertainment, meeting and convention amenities that have made Las Vegas such a powerful market. Some properties in Atlantic City have deferred investing in this redefinition process for too long. Atlantic City clearly needs more hotel rooms: More hotel rooms will support more meetings and conventions, which will encourage more air lift and infrastructure investment, which will in turn lead to more multi-day stays and utilization of all of the above—it is a virtuous circle.
And the beauty of the virtuous circle is that it increases not just gaming spend but also non-gaming spend. The new projects that are being built will move Atlantic City in that direction, making this market a healthy and profitable place to invest capital. And we are putting our money where our mouth is: Whitehall Funds, the real estate principalling arm of Goldman Sachs, has invested capital in developing a casino-resort site on the south end of the Boardwalk.
Let’s talk about the manufacturing sector. It’s been flat for the past couple of years. Will server-based gaming revive those companies?
People mean many different things when they refer to “server-based gaming,” but one thing is clear: There’s a great deal of excitement around all kinds of technology that will enhance the experience for gaming customers in the coming years and create additional revenue streams for the gaming technology companies and equipment manufacturers.
Much of this is already happening: Electronic table games, the convergence of slots with lotteries, mobile device-based gaming, server-based gaming, exciting immersive experiences—the technology side of the business is continuously improving, and the creativity and innovation that this industry has shown has never been more exciting than it is right now.