Thursday, Dec. 5, 1996 | 11:59 a.m.
The pace of gaming consolidation may have slowed temporarily, but will pick up speed again once gambling is fully accepted as a part of the entertainment industry, experts predicted.
Entertainment giants such as Disney, Sony and MCA will soon realize it makes "strategic sense to create huge, worldwide companies that marry theme parks, movies, music and the entertainment megastores of the gaming industry," said Glenn Schaeffer, president of Circus Circus Enterprises Inc.
"Thus far, ITT Corp. is the only company from outside the gaming industry to come in and take a position" with its purchases of the Desert Inn and Caesars World," he said at the American Gaming Summit Wednesday.
"Almost without exception, the big entertainment companies tend to be run by movie guys," he said. "And the three or four who'd benefit most (from a gaming company acquisition) don't have a single line of business as profitable as Circus Circus.
"Our industry, with its high rates of return, stable cash flows and high margins, would be a tremendous asset for companies such as Disney, Sony or MCA."
Schaeffer joined Players International Inc. President Howard Goldberg and Bear Sterns & Co. Vice President Rob Heller in a panel discussion over the consolidation of gaming power into a handful of giant companies.
Heller noted that the slowdown in gaming's growth into new domestic venues, higher costs of construction and capital and increased competition have led to such mergers as Hilton's acquisition of Bally Entertainment, ITT's buyout of Caesars World and Circus Circus' purchase of Gold Strike within the past two years.
He cited a Bear Sterns study showing the average cost of debt for large-cap gaming companies is 7.7 percent, while mid-cap companies pay 10.7 percent and small-cap companies 12.4 percent.
"We've done studies of mid-cap companies such as Station Casinos, Aztar, Grand Casinos, Primadonna and Showboat," he said.
"If you consider debt refinancing, lower overhead and other economies, shareholder worth doubles if they merge into bigger companies."
The benefits of bigness include lower capital costs, multiple properties in diversified markets with a diversified customer base and that ability to use attractive, higher priced stock rather than cash to make acquisitions, Heller said.
"All this points to a trend toward industry consolidation," he said.
Egos, though, often get in the way of mergers that would benefit both companies, Goldberg said.
"Everyone thinks they know how to run everyone's business," he said. "You might be able to overcome the personalities, but financial and regulatory structures can also be a problem."
Also, he said, "There are only five or six potential buyers, and I don't think you can say it's logical a company like MGM will want to buy a riverboat gaming company in Indiana."
That could change for such small companies, Goldberg said. "If you have patience and your shareholders aren't panicky, you can be around as the industry recycles. We just can't predict where we'll be a year from now."
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