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Analysts: Borgata Will Pull Business from Rivals

LAS VEGAS --The debut next summer of Borgata, a $1 billion luxury casino resort in Atlantic City's Marina District, will cannibalize business from existing casinos and force New Jersey casino operators to increase promotions to fight for customers, two Wall Street investment firms say.

The reports counteract more upbeat claims by casino companies that the Borgata, the city's first new casino project in more than a decade, will ultimately help casino operators by driving more customers to the region. Borgata is a joint venture of Las Vegas gambling companies MGM MIRAGE and Boyd Gaming Corp. and marks the debut for both in the big Atlantic City market.

"We do not believe the Borgata will grow the Atlantic City market enough to offset the increase in gaming supply," said Goldman, Sachs & Co. gaming analyst Steven Kent in a report issued to investors last week.

In a separate report, Bear, Stearns & Co. analyst Jason Ader estimates the Borgata could generate $630 million in gross gambling revenues in 2006, cannibalizing $365 million from existing casinos yet generating $265 million in incremental revenues for Atlantic City. Overall, the city could see a 5.3 percent increase in gambling revenues that year, from $5 billion to $5.3 billion.

Casinos along Atlantic City's famed Boardwalk will likely suffer the most, losing about 7.7 percent in total gambling revenues in 2006 as a result of the Borgata, Ader said. The city's two existing Marina District properties will likely lose about 4.8 percent in 2006, he said.

Borgata executives have indicated the property will be "highly promotional" to develop the property's customer database and get people into the casino, The Goldman Sachs report said.

"The double whammy of increased supply along with increasing promotional activity without a major increase in new customers should lead to renewed promotional wars in the market," Kent noted. "This should lead to eroding margins, as promotional activity over the past year has remained relatively low."

Atlantic City casinos -- which have fewer non-casino amenities to distinguish competitors from one another -- already spend more on promotions than Las Vegas Strip properties, Ader said.

Operators will need to invest more capital than previously to remain competitive, including adding new slot machines, improving amenities and upgrading rooms, analysts said.

Bigger casino companies such as Las Vegas-based operators Harrah's Entertainment Inc. and Park Place Entertainment Corp. will be in the best position to access such capital, they said.

In particular, Harrah's location next to the Borgata and its Total Rewards slot club loyalty program will help it retain customers, Kent noted.

Park Place is installing "cashless" slot machines at its three major casinos along the Boardwalk, consolidating its gaming license between two properties and renovating rooms at the Claridge Casino Hotel -- all moves that will help the company fend off competition from Borgata, he said.

The Borgata will have the greatest potential effect on the Tropicana Casino and Resort casino owned by Phoenix-based Aztar Corp., which generates more than 60 percent of the company's cash flow from the Atlantic City property, Ader noted.

Competition will ultimately help Atlantic City fend off future competition from nearby states such as New York, Pennsylvania and Maryland, analysts said.

"In our opinion, this immediate threat will serve as the catalyst for operators in Atlantic City to further focus on moving the market away from a commoditized gaming destination and toward a more diversified gaming and entertainment destination, Ader noted. "We believe this would provide the differentiation needed to stem losses in visitation to Atlantic City, as neighboring states could begin to introduce relatively 'plain-vanilla' slot parlors at racetracks."

Competition from gambling in neighboring states could eventually cannibalize as much as $750 million from Atlantic City properties in 2006, Ader said. That could force an overall decline in Atlantic City's total gambling revenues by about 14 percent, to $4.6 billion from $5.3 billion.

Limited competition in the past has meant limited design innovation and property development -- a situation that will likely change for the better once the Borgata opens, Ader said.

"In our opinion, Atlantic City should not be viewed as a stagnant gaming market, but rather as a distinct gaming market, ripe with opportunities for operators willing and able to commit the capital needed to move Atlantic City toward becoming a more balanced entertainment and gaming venue."

Atlantic City visitors typically spend less per trip but visit more often, resulting in yearly expenditures that are 11 percent above the typical Las Vegas Strip tourist, according to figures from the Atlantic City Convention & Visitors Authority and the Las Vegas Convention and Visitors Authority.

Atlantic City tourists also tend to visit the city primarily to gamble and spend a much greater share of their budget on the casino floor compared to tourists in Las Vegas.

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