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Atlantic City Gaming Prey to Cannibalizing

There is good news and bad for the gaming industry in Atlantic City. That sounds like the straight line to a joke, but this is no joke.

The good news is that the Borgata is opening in the middle of next year and should be driving an added $265 million a year into Atlantic City casino coffers by 2006, according to a Bear, Stearns & Co. report released Tuesday.

The bad news is that added competition from new gaming operations in neighboring states likely will be "cannibalizing" $750 million out of the Atlantic City market.

Overall, total gaming revenues in Atlantic City are expected to drop $400 million, or 8 percent.

The new Borgata - the first new casino in Atlantic City since the Taj Mahal opened in 1990 - should generate $630 million in gaming revenue in 2006. Of that, however, $365 million will come out of current operators in Atlantic City.

If that was the whole story, Atlantic City gaming revenues would increase by 5.3 percent to $5.3 billion from $5 billion.

However, Atlantic City is also expected to take a hit from new operations in New York, Pennsylvania and Maryland.

Between now and 2006, Bear, Stearns estimates that 37,600 new gaming positions will be added at 14 facilities within 200 miles of Atlantic City.

This would include 18,600 positions at three Native American casinos and three race tracks in New York, 10,000 positions at four racetracks in Pennsylvania and 9,000 added positions at four race tracks in Maryland.

These operations should cannibalize $750 million of Atlantic City's annual revenues by 2006, clipping revenues to $4.6 billion.

The biggest winners will be Boyd Gaming and MGM Mirage, joint venture partners in the $1 billion, 2,010-room Borgata, and International Game Technology, the major manufacturer of slot machines.

"We hope they're right. The Borgata is our central focus right now. We're in the home stretch of a six year process," said Boyd Gaming spokesman Rob Stillwell.

The Borgata willl be first new casino in Atlantic City since the Taj Mahal opened in 1990.

"We're extremely excited about the project and what it's going to do for our company," he said.

It has been touted as Atlantic City's first Las Vegas-style destination resort and is expected to set the standard for future gaming development in the mid-New Jersey Coast area.

"This is the first next-generation project for our company. Looking beyond the Borgata, all the land we have at the Stardust site presents us with great longer term growth opportunities," Stillwell said.

The biggest losers in the competition for Atlantic City gaming dollars, according to Bear, Stearns analysts, will be Tropicana operator Aztar Corp., Harrah's Entertainment and Park Place Entertainment Corp.

Of the three, Harrah's may be "best positioned to retain share. It should be better able to market and retain a loyal base of customers, but it will not be immune (from the competition) and has few near-term catalysts for growth," Adder said.

Harrah's spokesman David Strow acknowledged that in the short-run, the added rooms of the Borgada will have an effect.

"But in the long run, we feel we're well positioned there with a $193 million expansion at Harrah's Atlantic City and a $90 million expansion of the Showboat now underway."

With regard to competition from neighboring states in the form of racinos, Strow said Harrah's expects the impact to be "negligible."

"Aztar is (more) likely to be hurt since the bulk of its revenue comes from its Atlantic City properties," said Bear, Stearns analyst Jason Adder.

Park Place will feel the effects of competitive pressures since a quarter of its cash flow comes from Atlantic City operations and it has very few near term growth opportunities, he said.

At Park Place, spokesman Robert Stewart said: "I beg to differ with the Bear, Stearns analysis. We're going to be a leader in gaming in New York State."

Further, "our concentration of market power at the center of the Boardwalk in Atlantic City is a major competitive advantage for us. Frankly, we're recreating Atlantic City as a destination resort," he said.

The the past 12 years while development has lagged in Atlantic City, 12 mega-resorts have opened in Las Vegas including Excalibur, Treasure Island, Luxor, MGM Grand, New York-New York, Stratosphere, Monte Carlo, Bellagio, Mandalay Bay, Venetian, Paris Las Vegas and the Aladdin.

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