Analysts: LV needs flight plan

Gary Thompson

Thursday, Oct. 16, 1997 | 10:08 a.m.

Clark County commissioners, casino operators and air carriers must work together to solve infrastructure problems threatening Las Vegas tourism, gaming analysts said Wednesday.

The analysts appearing on a panel at the World Gaming Congress & Expo agreed that airline and highway "pipeline problems" have to be resolved if Las Vegas is to handle enough tourist growth to fill another 30,000 rooms expected to be built by the year 2000.

"I don't think it should be left to the casino operators to solve the infrastructure problems," said Rodman & Renshaw analyst Danny Davila.

"It's up to the Clark County Commission and the airlines ... who will have to bring in bigger planes but won't do so without subsidies" that will offset lower seat revenues on flights into Las Vegas, he said.

Noting that 26 new airline gates are expected to open at McCarran International Airport by next summer, Prudential Securities analyst Joe Coccimiglio said low yields have made a tough sell for airport authorities hoping to attract more flights to Las Vegas.

"So far, only eight gates have been spoken for, all by the discount carrier Southwest, and all the major carriers have said, 'No thanks,'" because yields are so low, Coccimiglio said.

"The big issue is to subsidize airlines to bring in new passengers, especially from the East Coast," said Bear Sterns analyst Jason Ader. "That will ultimately determine how big the Las Vegas market will get."

The reluctance of major carriers to add nonstop flights by wide-body planes from major East Coast cities also will mean a shortage of first-class seats, which could affect the openings of new high-end resorts such as Bellagio and Paris, the analysts said.

"You need more first-class routes into the city to get enough high-end customers to fill the rooms," said Deutsche Morgan Grenfell analyst Jim Murren.

Smith Barney & Co. analyst Harry Curtis concurred, saying the more direct flights serving more wealthy clients will be needed to add the 3 million to 4 million increase in McCarran visitor volume needed by the year 2000.

Some of the securities industry's top gaming analysts differed on the casino outlook for Atlantic City and the Gulf Coast, as well as the outcome of the Hilton-ITT conflict racing toward a seminal shareholder vote next month.

And several took a few shots at The Man Who Wasn't There -- Atlantic City casino mogul Donald Trump, who rarely attends gaming conferences in Las Vegas. Some suspect it's due to his long-running feud with Mirage Resorts Chairman Steve Wynn.

"Sometime soon -- perhaps within the seven to 10 days -- ITT will increase the size and price of its tender offer to $80 a share for 50 million shares," Murren said.

Murren also predicted ITT Corp. would defeat a hostile takeover attempt by Hilton Hotels Corp., which he said would then split into two companies.

But Smith Barney's Curtis disagreed, saying Hilton's $11.5 billion bid for the Caesars World parent company would be approved by ITT's shareholders at an annual meeting Nov. 12. Institutional investors own about two-thirds of ITT stock and are generally considered to favor Hilton's offer.

Murren said Hilton blew a golden opportunity to acquire ITT last January, when its stock was trading at $43 a share.

"It was a brilliant move to try to acquire ITT," he said. "If Hilton had bid $70 a share then, it would be a done deal. But they bungled it badly by bidding only $55 a share initially, because that gave ITT time to put together its defense."

Faced with Hilton's $70-per-share cash bid for 50.1 percent of ITT common, along with a stock swap for the remainder and assumption of debt, ITT launched its own offer to buy back up to 30 million of its shares for $70 each.

ITT's defensive strategy also calls for splitting the company into three parts, spinning off the hotel-casino and technical-schools businesses as "dividends" to shareholders and retaining a telephone directories unit as the core company.

ITT's current board would be installed at ITT Destinations, the hotel-casino spinoff, if shareholders approve the defensive plan at the annual meeting on Nov. 12.

"I think ITT will prevail on the financial merits of its plan," Murren said. "And when it does, Hilton will break itself up" into a real estate investment trust for hotel properties and a corporation operating gaming resorts.

ITT Corp. Vice President Jim Gallagher said, "Between now and our annual meeting, you're going to be hearing a rumor an hour and we're going to decline to comment on the rumors.

"Our board and management are looking at a number of ways to enhance shareholder value and when there's something to announce, we'll announce it."

Gallagher declined to comment on Murren's prediction of a Hilton breakup.

Hilton executives were meeting with institutional investors and couldn't be reached for comment. But a breakup of Hilton would be a 180-degree departure from President Steve Bollenbach's oft-expressed views on the benefits of industry consolidation.

Atlantic City offers great growth potential for casino operators capable of building megaresorts there, the analysts said.

"What's missing there now is the quality of builders," Coccimiglio said. "Trump is the leader in Atlantic City and the quality of what he's built there pales in comparison to companies such as Mirage, the premier builder in the industry."

The highly publicized battles between Wynn and Trump, who's trying to block Mirage's development of the H-Tract in Atlantic City, is confusing investors, the analysts said.

"Uncertainties create risk profiles for investors," Ader said. "It's really unfortunate there've been delays on the H-Tract development, which could help everyone in that market."

"The infighting adds to the concern investors have about this industry," Murren said.

"Trump doesn't have the product to compete with Las Vegas, and it was transparent what he was doing," Davila said. "It was unfortunate that some Atlantic City officials allowed themselves to be bullied there."

In a later session on Atlantic City's future, Murren and MGM Grand Inc. Chairman Terry Lanni talked about the area's potential.

"The properties there now are dull at best and pathetic at worst ... due to a lack of imagination by the builders," Murren said. "When you bring companies like MGM and Mirage into the market, that will change.

"Right now, Atlantic City operators are competing on price, which is bad for the profit-and-loss statement," the analyst said. "The couponing there is unforgiveable, and Donald Trump has been the leading culprit. MGM, Circus and Mirage won't market that way."

Atlantic City casino operators have offered coupons, other discounts and cash incentives to buy customers, a move criticized by analysts.

"Atlantic City needs new operators more than they need Atlantic City," Murren said. "If these companies don't come, Atlantic City is in a lot of trouble."

Lanni said improved regulatory and political climates "have created an atmosphere for the renaissance of Atlantic City." But he criticized the current casinos, saying, "If you take off a few minarets and the like, the buildings would look like Sears Roebuck distribution centers.

"We want to develop emotionally engaging destination resorts that make people want to return time and time again," he said.

At the analysts' seminar, Curtis said the Mississippi Gulf Coast is the "most ripe emerging market" for gaming expansion.

"There are only 1,200 quality hotel rooms there now, though that will grow to nearly 4,000 by the time Mirage's Beau Rivage project is completed," he said.

He predicted the Gulf Coast's annual gaming revenue will climb to at least $850 million from the current $750 million with the addition of Beau Rivage.

"Mirage will be the dominant operator there by the end of 1998, with Grand (Casinos Inc.) second," he said.

"I think Grand will be at tremendous risk there because they don't have the capital strength or management to compete with Mirage," said Coccimiglio. He and Curtis agreed that Back Bay casinos such as the Imperial Palace will face competitive problems.

"The Imperial Palace has a poor location, poor access and poor non-casino amenities," said Curtis.

Davila said even Mirage may face problems.

"I'm more concerned with infrastructure on the Gulf Coast that in Las Vegas," he said. "There've been a lot of lofty predictions about what Mirage will do, and if they don't do $120 million in annual cash flow, will that bring the whole group down?"

Murren said he doesn't expect any move toward gaming industry consolidation unless Hilton succeeds in acquiring ITT. Instead, he said, "There's a chance the industry will move back toward private ownership," with leveraged buyouts by company managements unable to sustain the earnings growth demanded by Wall Street.

Ader said that an analysis of the last 20 casino openings in the United States showed that "the economic returns haven't been stellar." This could lead to more buying of properties than building, he said.

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