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Scams or Saviors?

Do management companies make sense in this economic environment?

Scams or Saviors?

Let me get this out of the way up front: this article is self-serving. Many will read it and claim I only wrote it to help my firm as it continues to grow—and they would be correct (but I would note, how many people really write articles for gaming trade publications out of the kindness of their own hearts?). But that doesn’t mean that I am not absolutely, positively right.

Five years ago I founded the Fine Point Group with the goal of it becoming the preeminent independent organization focused on improving casino operations around the world. I felt that people—whether in casinos themselves, or in the investment community that puts its money to work there—needed a group they could call on for a unique and different perspective, and that we could fill that gap.

It has not been an easy road—it never is in entrepreneurship. In the first few years, with limited credibility and a great economy, it was easy for prospective clients to say they didn’t need our services. But as the economy went south two years ago, and having cobbled together a track record of helping optimize performance without capital expenditure, we began to experience explosive growth.

In late 2008, we won the largest commercial management contract of the year, at Detroit’s Greektown Casino, and after almost doubling EBITDA and increasing the value of the enterprise by more than $200 million, I expected to be able to sit back and watch the phone ring.

And then an interesting thing happened—I started to learn that we were competing for management contracts with the kind of companies we left to start FPG—companies like Harrah’s and Isle of Capri.

At first, we felt flattered. We have an immense level of respect for some of these companies, and wouldn’t have expected our young firm to be competing against them for anything. But after setting ego aside, we began scratching our heads as to why any independent casino owner would consider—even for a second—hiring one of these companies to manage their casino.

Why? It isn’t because these companies are necessarily “bad” (though it is my opinion that some are). Many of these are world-class companies worthy of our admiration. Rather, it is a mistake because hiring a company that owns its own casinos creates structural conflicts of interest between the independent casino developer (or tribe, as the case may be) and the manager. To illustrate these conflicts, imagine a new tribal casino in Oklahoma that is looking for outside management to help get the facility up and running. So what’s wrong with them hiring one of the big boys? We would submit four reasons:

Where does the “A-Team” get sent? To the property owned 100 percent by the “big boy” or to the one in Oklahoma where they get 2 percent of revenue and 5 percent of EBITDA? No rational casino operator is going to send its top talent into a property where they get a small share of the rewards when they can send them to one where they get all of the rewards.

Isle of Capri illustrated this in a most profound way when, the day after they landed their first external management contract, they announced they were hiring someone from outside their company to conduct their work there. So, after pitching their “Isle Style” capabilities, they sent someone who didn’t have one day of experience within their company to implement it at a new facility! Not surprisingly, for that among several reasons, the casino owner quickly backed out of the agreement.

What happens when you end up competing with the “big boy?” The Oklahoma tribal council could respond to this one quickly—none of the “big boys” operate in Oklahoma. But what happens when the “big boy” leverages the Oklahoma database to migrate players from Oklahoma to its other properties around the country (say, Las Vegas)?  Isn’t there an overwhelming incentive to move customers from a place where you get 5 percent of the revenue and 2 percent of the profits to somewhere where you can get it all?

This was the subject of a lawsuit in Las Vegas between Station Casinos and its joint-venture partner in Green Valley Ranch, the Greenspun family. The Greenspuns alleged that Station actively attempted to move players from their joint-venture facility to those it owned outright.

The suit was recently settled out of court. But while I don’t believe that Station engaged in that behavior, I certainly can understand why one would be worried about it.

Others ask this question about Aria (which is 50 percent owned by Dubai) versus the other MGM Mirage properties. Which begs the question: Why do these partnerships get started in the first place? Because, when times were great and the tide was rising everywhere, there was plenty of money to spread around. But now that markets are tighter, these properties start competing with each other, and these separations of interest begin to make themselves clear.

One size doesn’t fit all. The fact that someone is a great operator of casinos in a monopolistic or duopolistic Native American market, or a great operator of locals casinos in Las Vegas, etc., etc., doesn’t mean they will be a great operator of a casino in a very competitive Oklahoma tribal market. Many companies play out of one playbook, and that playbook very well may not work in your market. Just look at Harrah’s takeover of London Clubs—which I think even they admit has been an unmitigated disaster—for an extreme example.

You can put yourself right in the middle of a major “breach of fiduciary duties” lawsuit. Here’s one that our friends in Oklahoma wouldn’t consider for a minute, and why should they? It turns out that some of these larger “big boys,” working with some backers on Wall Street, concocted extremely complex debt structures. In real-people talk, it means that they got a first mortgage, and a second, and a third, and a 10th, etc.

In fact, some took it one step further, borrowing money from one group of people for some of their properties, and another group for others. Which means that—even without the Oklahoma property in the mix—many of these lenders may be angry that the “big boy” is preferring one set of properties over the one it lent money to.          

Throwing your property into the mix gives the “big boy” just one more group it has responsibilities to. And who do you think comes first—the banks they have borrowed hundreds of millions or billions from, or you?

In the end, working with a firm that doesn’t own other properties means that their highest priority is that of their clients. Because of that, firms like this don’t have the ability—or interest—in moving players from one property to the next, and certainly don’t have conflicting fiduciary duties to lenders.

That doesn’t mean that all management companies are equal—or even that the worst management company is better than the best “big boy.”  But I have probably made enough people angry with this article. I’ll leave my self-serving discussion of what makes the best management company for another day.