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Best of Liz Benston

Gaming Guru

Liz Benston

Year Saw Casino Companies Gearing Up for Consolidation

31 December 2004

LAS VEGAS -- In early 2001, Wall Street was reeling from a slew of mergers in the gaming industry over the past couple of years, with observers questioning the likelihood of future blockbuster deals.

What a difference three years makes.

A sea of change occurred in the gaming industry over the past several months, shaping into the biggest local business story of the year and -- with the nationwide expansion of gambling in high gear -- a story of mainstream interest.

MGM Mirage's plans to create the single largest casino empire in Las Vegas by acquiring Mandalay Resort Group for $7.9 billion and, weeks later, Harrah's Entertainment Inc.'s intention to buy Caesars Entertainment Inc. for $9.4 billion created a ripple effect industrywide that will be felt by employees, vendors and tourists for years to come.

In February, Boyd Gaming Corp. announced plans to gobble up Coast Casinos Inc. for $1.3 billion, creating a locals gambling powerhouse to rival Station Casinos Inc. And last year, Harrah's said it would buy riverboat casino operator Horseshoe Gaming Holding Corp. for $1.5 billion.

Both deals closed in July. The MGM Mirage deal is expected to be complete by the end of March and the Harrah's merger is anticipated by the end of June.

At least seven major casino mergers were announced or completed this year at a combined cost of $25 billion -- a record that likely won't be repeated. And prices were at a premium, reflecting insatiable demand for gaming assets. Analysts estimate the average casino transaction sold at a price equal to at least eight times the casinos' yearly cash flow, considerably higher than historical prices.

Though the particular marriages caught most by surprise, analysts say the deals are a natural outcome of slower than expected growth in the industry, with few opportunities nationwide to develop new casinos.

"There's a natural desire for these companies to show growth ... so they look at consolidation to grow as well as look at (cost savings) and leveraging undermanaged assets," said Marc Falcone, an analyst with Deutsche Bank Securities.

"If you'd asked me at the beginning of the year which companies would exist next year, I wouldn't have known," added Eric Hausler, an analyst with Susquehanna Financial Group.

Acquisitions of the scale of the MGM Mirage and Harrah's mergers weren't anticipated in 2000 because companies had just finished a round of consolidation and were highly leveraged, Hausler said. Since then, companies have performed well in spite of Sept. 11 and have deleveraged by buying stock and paying down debt. With interest rates at historic lows and fewer spending projects on the horizon, the environment was ripe for big deals, he said.

"They are financing these acquisitions at very low interest rates," he said. "Acquisitions that may not have penciled out in an interest rate environment that's three to four percentage points higher may pencil out now."

Few opportunities to build casinos outside of Las Vegas means companies can use healthy chunks of cash for strategic purchases, Hausler said.

The consolidation trend began before the MGM Mirage and Harrah's deals and Harrah's buying riverboat casino operator Horseshoe Gaming Holding Corp. and Boyd Gaming

While MGM Mirage and Harrah's have historically bought up other casinos over the years, this year saw private companies newer to gambling make big acquisitions. Hotel operator Columbia Sussex Corp. of Fort Mitchell, Ky. and real estate investors Colony Capital LLC of Los Angeles bought up less-prized assets from the gaming giants. In some cases companies said they were spinning off properties to slim down and pay off debt, while others sold casinos to satisfy specific regulatory concerns.

Analysts say they expect additional consolidation next year, though dollar values may be less than prior years.

Some companies will be busy integrating their purchases and others will be working on developments in Las Vegas that could piggyback on the tourism boost expected from Steve Wynn's megaresort, they say. Those include potential redevelopments at the Tropicana, Stardust and New Frontier as well as a slew of residential high-rises on or near the Strip.

"I think 2005 is going to be equally exciting" for gaming stocks, Falcone said.

A lack of available land on the Strip for development means newcomers are almost forced to consider potential acquisitions to enter the market, said Brian Gordon, a principal with Las Vegas economic forecasting firm Applied Analysis.

The success of the city's marketing and advertising efforts, increased media attention to the resort playground and a growing stream of tourists has attracted many nongaming companies to sniff out deals, he said.

"I'm not surprised to hear that nongaming companies or companies not historically aligned with Las Vegas are interested. They want to get into the game," he said.