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The Other Side

What will the gaming industry look like as the economy starts to rebound?

The Other Side

Financial catastrophe has been averted and the recession has apparently ended, though there’s still a big question mark hanging over the Las Vegas Strip thanks to all the high-end capacity coming online from CityCenter through to Cosmopolitan and Fontainebleau.

But the picture is clearing enough to give us an idea of how the landscape will look as we come out the other side.

What we’ll see in the remains of the euphoric building boom is new ownership, far less debt, lower valuations, much more modest growth plans, and an emphasis on operating rather than building.

It is a less exciting world than the one dotted with construction cranes and nearly limitless dreams of multibillion-dollar meta-resorts. But it is one grounded in economic reality, and one in which casinos can be run profitably.

Much of this new world is being formed in bankruptcy court, in a process where investors and lenders take their lumps but new owners have the opportunity to succeed.

The process is already well along. Tropicana Las Vegas may not be a glamour gal like its neighbors, but it is now debt-free, meaning prudent operators can make a profit.

And the Trop’s $125 million budget for a phase-one renovation makes a lot more financial sense than spending billions on a new resort.

Fontainebleau (below) has yet to emerge from bankruptcy, but it apparently will with around a $150 million purchase price and $1.5 billion dedicated to complete construction-manageable numbers, assuming always-prudent Penn National’s estimate that it can generate $225 million a year in EIBTDA proves correct.

Resorts in Atlantic City is now owned by its lenders debt-free. That makes for likely profitability, even for the smallest casino in a distressed market during a recession.

Planet Hollywood, not in bankruptcy but in default, apparently will be taken over by Harrah’s at the bargain price of buying its debt.

The Stratosphere and its three sister properties operated by American Gaming and Entertainment likewise now can make their nut.

And so it has gone and is going with others such as Herbst, Greektown and Trump.

Eventually, all the troubled properties will be in new hands. Meanwhile, management contracts have become the mantra for casino companies and entrepreneurs. The casinos owned by lenders have to be run by somebody, so why not angle for a management contract, thus getting paid while someone else takes the risk?

So far, this restructuring of the casino industry is creating few opportunities for public investors. The companies are being taken over by private entities with no debt or private financing.

Ultimately, that will change. Banks don’t want to be in the casino business, and private owners always have an exit strategy. Eventually, they will sell out, in many cases to the public. In other instances, public markets will be tapped for debt to finance buyouts or for property expansions and growth.

Of course, the United States is no longer the gaming or investing world. Wynn and Las Vegas Sands have made that clear by raising billions of dollars selling stakes in their Macau operations on the Hong Kong Stock Exchange.

And ambitious international companies ranging from Genting to Aruze are expanding globally, including in North America.

These are publicly traded companies in markets that are much more liquid and willing to take risks than in the U.S., where many financial institutions are still more worried about protecting balance sheets than about growth.

And there is still at least one big risk-taker among casino companies, as Sheldon Adelson forges ahead at Las Vegas Sands with grand, multibillion-dollar developments in Macau and Singapore and is on the hunt for more.

Meanwhile, there are a lot of theories being thrown around about the future. Among them are that consumer psyche has been permanently wounded and spending will not return to pre-recession levels. Another is that major new projects will not be built either because of overcapacity or overly cautious lenders.

We tend to think those theories are exaggerated. Many consumers will cut back spending, or can’t spend as much because their assets have been wiped out.

But recoveries do happen, memories of bad times dim, new consumers without scarred memories replace older ones, youthful ambition and exuberance are part of human nature, and people will always seek out entertainment.

In short, consumers will come back, though it may take a while and maybe not to the carefree levels of pre-2008.

As for building, it might be limited in Las Vegas, but not in the new jurisdictions popping up around the United States and around the world. Those projects will have to be financed, and some of them will be of the multibillion-dollar variety. And that will require investors, public and private.

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