Las Vegas Sun

March 28, 2024

the strip:

Did two gaming titans get too big?

Deals that once made sense led to borrowing that hangs over gaming giants

0418Casinos

Leila Navidi

Two giant companies, MGM Mirage and Harrah’s Entertainment, own 16 of the Strip’s 25 largest casinos. With both facing huge debts, fresh competition is possible if properties are sold for quick cash.

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Beyond the Sun

Steve Wynn, Part I

Uncertain Futures, seg. 2

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  • Uncertain Futures, seg. 2
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  • Steve Wynn, Part I

Steve Wynn, Part II

Poison of Choice?, seg. 2

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  • Poison of Choice?, seg. 2
  • Poison of Choice?, seg. 3
  • Poison of Choice?, seg. 4
  • Steve Wynn, Part II

Back in the Game

Back in the Game, seg. 2

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  • Phil Ruffin interview

Through two mergers proposed five years ago, the Las Vegas Strip largely became the domain of two corporate titans.

In 2004, MGM Mirage proposed an $8 billion acquisition of Mandalay Resort Group. Months later, Harrah’s Entertainment announced a $9 billion offer for Caesars Entertainment — a “me too” deal made possible by Wall Street’s heightened interest in the casino business.

MGM Mirage would go on to control about half of the Strip’s hotel rooms and Harrah’s, which would ultimately become the world’s largest casino company, less than 30 percent.

The deals made financial sense at the time, analysts say. But some wonder whether Las Vegas would be better off today had more competing casino operators — instead of executive teams running two major players — been in charge going into this recession.

“In this economy, Las Vegas might be better off with more individual operators, but before this downturn I don’t think it mattered,” said South Point owner Michael Gaughan, who has seen the consolidation and breakup process at work in his three decades of casino management.

With the Strip’s two giants at risk of filing for bankruptcy protection, the possibility is increasing that they will spin off casinos for quick cash. The prospect of new competition pleases some visitors and locals with a dim view of the consolidation of power between two companies that own 16 of the Strip’s 25 largest casinos.

Whether the industry or Las Vegas is better off with more independent operators or fewer corporate titans in charge is a debate that could yield lessons for the gaming regulators whose job it is to monitor such deals.

•••

Critics blame the companies’ financial problems on their size. Acquisitions enabled them to take on more debt, making them financially vulnerable, they say.

But executives and analysts say the poor economy is ultimately to blame rather than consolidation. The acquisitions benefited the state by increasing corporate profit, yielding more casino jobs as well as reinvestment in existing casinos and new properties, and boosting tourism by improving the attractiveness of Las Vegas.

UNLV economics professor Bill Robinson said the mergers created something akin to an oligopoly. They limited competition along a geographically narrow corridor, creating a situation where each company had to match the other’s ambitions.

“Big companies are better off not building,” he said. “But if one company builds, it wins, and if another one doesn’t, it loses, but if both build, they both lose.”

When MGM Mirage proposed its acquisition of Mandalay Resort Group, banks were enthusiastic to lend to casino companies because of the industry’s rapid growth and strong earnings. The company secured a $7 billion loan and turned down an extra $3 billion the banks wanted to lend. The loan was the largest in the casino business at the time and involved banks new to the gaming industry.

Bill Lerner, a gaming consultant with Union Gaming Group, attributes the companies’ current troubles to the economy, not consolidation. But Lerner acknowledges that growth, which begets more growth, helped them take on more of the debt that imperils the companies today.

“Consolidation enabled companies to grow even more rapidly and aggressively because they had more access to capital based on the cash flow they were generating,” he said.

•••

In separate hearings to approve the deals in 2005, Nevada regulators — required by law to foster industry competition and vet deals for antitrust violations — aired concerns about whether consolidation would lead to efforts to control prices for goods and services as well as a lack of innovation.

In approving the deals, regulators agreed with the companies’ position that casinos are unique and complex entities offering myriad, ever-changing attractions under one roof. It’s easier for car manufacturers to raise prices and control supply and demand, but price hikes at casinos are more difficult to implement across the board and, in any case, would prompt customers to go across the street to the nearest competitor’s property, executives said.

Lack of innovation would likewise be met head-on by opportunistic neighbors constantly scouting the competition, they said.

“Those of us who look after this combined company have to be aware that any lack of innovation on our part, any sclerosis in our efforts to be active, will be met with people coming in and just kicking us silly with new products that are much better than ours,” Harrah’s CEO Gary Loveman said in a June 2005 Gaming Control Board hearing before the board’s vote of approval.

Both MGM Mirage and Harrah’s noted that each of their properties has a different price point and appeals to a certain group of customers who prefer the mix of attractions there.

MGM Mirage’s property heads, called presidents, are given the autonomy to improve and run their properties how they see fit, executives told regulators at the time.

In addition, both companies said their deals — by increasing revenue and profit that would be reinvested in Las Vegas — would enable them to better compete with other tourism destinations worldwide as well as the rise of other gaming markets, such as California’s tribal casinos.

Regulators believed there were enough competitors on the sidelines — including Palms owner George Maloof, as well as Steve Wynn and Las Vegas Sands owner Sheldon Adelson — to foster competition on the Strip.

A key part of that argument at the time was an eye-popping pipeline of future growth. As many as 40,000 rooms, including resort hotel rooms and condominium units, were planned or under way on or near the Strip. Those included Wynn Las Vegas and neighboring Encore, Palazzo, the Trump condo-hotel tower as well as projects that didn’t pan out.

Even without many of these projects, the deals wouldn’t create monopolies — the primary concern of regulators.

Gaming Control Board Chairman Dennis Neilander blames company woes on the financial meltdown, adding that regulators must balance the growth and stability that some deals create against other factors, like market concentration.

“There are pluses and minuses to every deal. On balance they made sense from the state’s perspective,” he said. “They didn’t limit competition in a way that negatively affected the future growth of Las Vegas.

“The Las Vegas market has never been any more competitive than it is now,” he added.

•••

Recently, Steve Wynn has encouraged the breakup of gaming giants, saying new owners will bring fresh ideas to the table. And M Resort owner Anthony Marnell III has marketed his single, privately owned casino on the premise that owners based on site can react more quickly and favorably to customer needs.

Phil Ruffin, who recently purchased Treasure Island from MGM Mirage, said having a single owner-operator running a casino isn’t necessarily any better for customers or employees than a gaming giant.

“I don’t think it makes a lot of difference,” he said.

In fact, having a single operator rather than a conglomerate at the helm might mean more financial risk for a property because casinos are expensive to own and operate, he said.

Before selling the New Frontier to a real estate firm, Ruffin ran the property with a close hand and a lean budget, with few layers of management between him and his employees. Now he owns a higher-end property with a larger management staff and more overhead.

Ruffin says he won’t be running things much differently from the way MGM Mirage did, though he might find more ways to cut expenses being that he, the owner, will be based at the property seven days a week.

Gaughan has also chafed under the corporate mantle.

When Boyd Gaming bought Coast Casinos in 2004, Gaughan remained at the helm of Coast, running it like a separate company. In a move to downsize and become his own boss, Gaughan split with Boyd in 2006, selling his stake in the company and buying the casino he would rename South Point.

Gaughan remembers the days when the Las Vegas casino industry was populated not by Wall Street-funded giants but colorful — and opinionated — owner-operators.

“Sometimes we couldn’t agree which way the sun was going to rise in the morning,” he said of the Nevada Resort Association, the lobbying group he chaired in the early 1980s.

These days, company owners don’t usually attend association meetings. Instead, they send underlings who aren’t authorized to make decisions on their own, Gaughan said.

Giants such as MGM Mirage, Harrah’s and Station Casinos — tripped up by too much debt — are well-run companies that made competitors step up their game in Las Vegas, he said.

The health of the competitive landscape will ultimately depend on who takes over what — whether it’s a group of bondholders installing the nearest available casino chief or a skilled operator on the sidelines, like a Jack Binion, Gaughan said.

“I would not want Jack Binion” running a nearby casino, he said.

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