Terror slowdown topped gaming year

David Strow

Wednesday, Jan. 2, 2002 | 11 a.m.

The slowdown in tourism after the Sept. 11 terrorist strikes was by far the gaming industry's biggest story in 2001.

Air travel into Las Vegas plunged, as did the number of tourists coming into the city's resort hotels. Casino companies saw their earnings plummet, and more than 13,000 casino workers lost their jobs along the Strip.

Other gaming markets rebounded quickly, but not Las Vegas, a market heavily dependent on air travel.

"Never before had we seen terrorist activity that impacted gaming and lodging so intensely, and it continues to have an impact on the performance of Las Vegas casinos and their operations," gaming analyst Andrew Zarnett of Deutsche Banc Alex. Brown said.

The situation has recovered somewhat. Visitors have started coming back, though many more are driving in rather than flying. They've been paying lower rates for their hotel rooms, as Strip resorts offer discounts to draw customers. A slew of expansion projects on the Strip, including expansions of Caesars Palace, the Venetian and Mandalay Bay, were temporarily suspended.

About a third of the casino workers laid off after Sept. 11 returned to work in the weeks following the attacks as business resumed, though only on a part-time basis. A more solid recovery isn't expected until sometime in 2002, and even then, it is expected some of the laid-off casino workers will never get their jobs back.

Other big stories in 2001 included the bankruptcies of the Aladdin and the Regent Las Vegas.

Since it opened in August 2000, the $1.2 billion Aladdin had strugged. The property, hobbled by design flaws, a massive debt load and infighting between its owners, could not produce enough cash flow to even make interest payments on its debt.

Sept. 11 proved to be the final blow. Before September ended, the Aladdin had filed for Chapter 11 bankruptcy, in what was believed to be the largest bankruptcy in the history of the Nevada gaming industry. It is expected to be put on the sales block sometime in 2002 -- and creditors are expected to take a huge loss.

Sept. 11 also had a notable effect on the Regent Las Vegas, another struggling property that went into bankruptcy in late 2000. Opened at a cost of $276 million in summer 1999, the Regent sold for a mere $80 million in late September. Only one bidder -- Hotspur Resorts -- emerged in a court auction, an outcome blamed partly on the Sept. 11 slowdown.

Some believe the losses investors took on both will make others wary of putting up more cash for new Las Vegas casinos.

"The Aladdin bankruptcy and Regent bankruptcies are dampening factors," said Bill Eadington, director of the Institute for the Study of Gambling and Commercial Gaming at the University of Nevada, Reno. "The lesson of the Aladdin is that, even for Steve Wynn, it's going to be more challenging (to raise money)."

Others, however, believe there are those that still will be able to raise cash.

"If you build a casino that's improperly designed and capitalized, you can be a casualty," Zarnett said. "A well-executed, planned and capitalized companies will have a high likelihood of being financed and successful. If you're on the opposite end, it will be difficult."

As far as mergers, the deals of 2001 certainly weren't the size of 2000's or 1999's. But despite the slowdown, deals got done. The year started with the closing of two deals by Station Casinos Inc., as the Las Vegas-based company added the Reserve (now the Fiesta Henderson) and the Fiesta to its portfolio of properties.

The largest deal of 2001, closed last Sunday, was International Game Technology's $1.5 billion takeover of Anchor Gaming of Las Vegas.

Harrah's Entertainment Inc., an active acquirer in recent years, struck again this summer with a $675 million buyout of Harveys Casino Resorts of Lake Tahoe.

Other notable deals of the year included Argosy Gaming Co.'s $465 million purchase of the Empress Casino & Hotel in Joliet, Ill.; and Boyd Gaming Corp.'s $125 million purchase of the Delta Downs racetrack in Louisiana.

"There's fewer companies left, so there's fewer opportunities to consolidate," Zarnett said. "Second, post-September, companies have been focused on their businesses, sustaining existing business, rather than growing by acquisition."

Another notable development in 2001 was the growth of Indian gambling in California -- the largest market for casinos on the Las Vegas Strip and in Laughlin and Primm.

Since California voters approved legalized tribal gaming in May 2000, gambling has spread rapidly in the Golden State. There are now more than 40,000 slots in the state's 46 casinos, up from less than 20,000 in May 2000.

"As permanent casinos open up, you'll see more serious competition that will affect Laughlin, Jean and the state line casinos more than it will affect the Strip," Eadington said. "There will be some erosion. On the other side, by creating a new market, it could have some positive spillover effects."

Another area seeing a dramatic expansion of gambling is New York. State lawmakers approved a bill in October approving up to six new tribal casinos -- three in Western New York, three in the Catskills near New York City. The move potentially opened the door for Park Place's vision of a $500 million resort casino in the Catskills, though approval from local, state and federal authorities is still pending.

Overseas, the United Kingdom appears poised for a drastic expansion of legalized gambling. In July a British federal review panel recommended sweeping liberalization of that country's gaming laws, raising the possibility the U.K. could become home to Las Vegas-style resorts.

On the other side of the globe, the Chinese coastal city of Macau -- an autonomous enclave within the People's Republic of China -- moved to break up the casino monopoly held for 30 years by billionaire Stanley Ho. Twenty-one entities -- including companies backed by MGM MIRAGE, Park Place, Mandalay Resort Group, Steve Wynn and Venetian owner Sheldon Adelson -- have placed formal bids for the three licenses to be awarded in Macau. A decision is expected early in 2002.

"These (Macau and the U.K.) could be major international expansions for these companies," said gaming analyst Sebastian Sinclair of Christiansen Capital Advisors. "It's been piecemeal development (overseas) so far. That has the possibility to change. Companies like MGM and Park Place have to expand internationally to continue to grow."

Closer to home, Gov. Kenny Guinn signed Assembly Bill 466, authorized the Nevada Gaming Commission to begin licensing Internet casinos at its discretion. So far, the commission has taken no steps toward legalization.

A host of hurdles still remain -- most notably, whether Internet gambling is even legal under federal law. The Department of Justice says no; gaming industry and Internet gambling proponents say yes. A decision is still pending before an appeals court in New Orleans.

Las Vegas attorney Tony Cabot, an Internet gambling expert, believes Internet gambling is inevitable, but acknowledges Nevada's involvement isn't.

"The question now becomes, will it become an Internet industry based in Nevada or not?" Cabot said. "That question still needs to be addressed."

And as the economic fallout of the Sept. 11 attacks continued to settle, two casinos opened in and near Las Vegas.

First came the $265 million Palms, opened by the Maloof family on Nov. 15 on Flamingo Road west of the Strip.

One month later the $300 million Green Valley Ranch Station Casino opened in Henderson. It's a joint venture of Station Casinos and the Greenspun family, owner of the Las Vegas Sun.

The biggest opening, however, is yet to come. Wynn continued moving forward in 2001 with his project at the Desert Inn site, a massive casino he's dubbed "Le Reve." The year saw Wynn file plans with the county, demolish part of the D.I., name his proposed resort and start the process of raising money. The year 2002 should see the groundbreaking of the new resort, followed by an opening sometime in 2004 or 2005.

"That (Le Reve) gives the anticipation of the next wave," Zarnett said.