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Best of Ken Adams

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Quick-takes: The month's trends in a glance - February 2008

1 March 2008

TAKE ONE

The much touted buyout of Harrah's is finally done. It marks the largest and latest of the buyouts of public gaming companies by private equity firms; the other two announced in 2007 were Stations, which was finalized before the end of the year, and Penn National. "Buyout" was nearly the buzz word of the year in 2007. It was the rage, and every company was at some point the subject of a buyout rumor, even IGT, the 400-pound gorilla of manufacturing. In 2008 that seems highly unlikely, and the trend also appears highly unlikely to continue. The market has changed too much, fueled by the crisis in "sub prime" home mortgages and the overall economy; money is not as easy to come by and deals that looked easy just a year ago appear to be nearly impossible in 2008. Still, there is a new attempt just announced. Tilman Fertitta of Landry's wants to take his company private, possibly motivated by his cousins' success with taking Stations private. Tilman is not apt to find the market as receptive as his cousins did – but the announcement did help his stock price.

Harrah's Entertainment Inc. said its $17.1 billion going-private transaction closed as scheduled on Monday, marking the world's largest casino buyout. (Associated Press, 1-28-08)

Tilman Fertitta is attempting to take Landry's private. Fertitta, the chairman and chief executive who owns 39 percent of the company, is offering to acquire all outstanding common stock, according to a statement released by Landry's. The deal would be worth $1.3 billion. Landry's shares skyrocketed on the news. (David Kaplan, Houston Chronicle, 1-28-08)

Alliance Data Systems (ADS) is the latest victim of the buyout bust – but it won't be the last. Shareholders in the Dallas-based credit card transaction processor lost out on a big payday Monday when their company's $6.4 billion private equity buyout from Blackstone unraveled…Why are so many deals in jeopardy of unraveling…in most cases the problem is simply that money is finally getting tight after a long debt-fueled boom…The happy buyout math changed last summer, when the market for mortgage-backed securities collapsed under the weight of growing defaults. The episode reminded investors that loans sometimes don't get repaid, and caused them to demand much higher interest rates for riskier deals - particularly those in which the borrowers were taking on a lot of debt relative to the target company's profits and cash flow… Of course, plenty of deals are still getting done. On Monday, buyers led by Apollo Management and TPG completed their $17 billion purchase of casino operator Harrah's. And investors aren't skeptical of every transaction. Roche Holdings of Switzerland recently bid $89.50 a share for Ventana Medical Systems. Ventana shares recently traded near $89, indicating Wall Street doesn't expect the big drug company to have any problem closing the deal. (Colin Barr, Fortune, 1-28-08)

In England, it is a common practice to bet on the outcome of elections – and just about anything else, but in the United States it is not quite so common. However, in an article in the Wall Street Journal, the Journal announced it was getting into the business of political wagering. Even more amazing, the Journal sees no difference between buying and selling bets on political candidates and buying and selling stocks and bonds.

The Wall Street Journal has teamed up with Intrade, a political futures market where you can "trade" on candidates' future performance or see how others assess their chances. This presidential election season, political betting markets are a hot topic. Major news sources and other authorities are citing their ability to predict outcomes... It's true, political betting markets, like other financial markets, can be helpful tools for trying to predict the future. And they give a fascinating day-by-day picture of the ins and outs of these extraordinary political races. Just one caveat: These markets are a long, long way from infallible. Just like other financial markets, they are prone to popular moods and intemperate swings. When pricing houses, or shares in Pets.com, or the prospects of political candidates, the market does not always know best...I've been writing about political betting markets for years – since I lived in England and wrote a book about sports futures betting, which included political futures… Markets are fascinating. I'm as absorbed by political betting as I am by the stock market – right now, maybe, more so. The prices tell stories. They contain wisdom and folly, clues and surprises. Respect them, by all means. But don't revere them. The "crowd" isn't always right. (Brett Arends, Wall Street Journal, 1-2-08)

Some jobs create a world of new opportunity. One of those in gaming is regulation; former regulators are in demand. They have great contacts and great reputations, even if their qualifications are a bit less than one would want. It is certainly not uncommon to see a regulator leave Nevada, New Jersey, Mississippi or some other state and go to Indian gaming as a regulator or even a manager. Another place former regulators are in demand is on a board of directors of a gaming or manufacturing company. They help a company stay in compliance, get new licenses and approvals, and raise the company's standing in the regulatory community.

There are places that one does expect to see people from the operations side of gaming, and that is government. The federal government reached out to Sheldon Adelson to help international trade. This time it was his experience and success that appealed to the government; Adelson has been very successful in negotiating with China in Macau and Singapore. For his part, he says he is looking forward to showing the way to better negotiation and fewer trade restrictions. The government wants to use his reputation to improve its reputation, rather than the usual way in which a person uses the state's reputation to enhance his own.

Former Gaming Control Board member Bobby Siller was named on Monday to the board of directors of slot machine maker WMS Industries. Siller, 63, spent eight years on the Gaming Control Board, leaving Dec. 31, 2006, when his second four-year term expired. He didn't seek reappointment. Siller is also a 25-year veteran of the FBI and spent three years as special agent-in-charge of the Las Vegas office. Siller was considered one of the control board's most vocal members during his time on the regulatory panel… During the past year, Siller and former control board chairman Steve DuCharme served as a tribal gaming commissioner for the newly opened Four Winds Casino in New Buffalo, Mich. (Howard Stutz, Las Vegas Review-Journal, 1-7-08)

Adelson said governments in China and Singapore, where the Sands is building convention centers and casino-resorts, have been "very cooperative" and most problems are "issues of understanding rather than contentious issues." Billionaire casino executive Sheldon Adelson has parlayed his company's massive investments in China into a four-year presidential advisory position with the U.S. Trade Representative office. The appointment to the Advisory Committee for Trade Policy and Negotiations comes as Adelson's Las Vegas Sands Corp. is following through on plans to invest some $13 billion to transform the Chinese gambling enclave of Macau into a casino resort that mimics the Las Vegas Strip. The company opened the $2.4 billion Venetian Macao, the second of several properties planned there, in August… the chief executive, ranked third on Forbes magazine's list of richest Americans, relished the thought of attempting to influence China to ease controls on its yuan, which the United States views as undervalued. (Ryan Nakashima, Associated Press, Las Vegas Sun, 1-7-08)

Competition is a developing story – it was a major story in 2007 as New Jersey struggled to absorb the effect of slot machines in Pennsylvania. Most writers treated the story as if it were just a short term and very temporary one – after all until 2007, gaming revenues had grown every single year in Atlantic City since gaming first began 28 years ago. But by the end of the year, it was clear to just about everyone that slot machines in Pennsylvania – and there will be more in 2008 and 2009 than in 2007 – will always affect revenues in Atlantic City. But that is not the end of the challenge – there are more states debating gaming, namely Maryland and Massachusetts, that will also impact Atlantic City revenues. Expanded gaming in New York will also have its impact.

Atlantic City is not the only jurisdiction feeling the pain of growing competition; Connecticut is also feeling the pinch; West Virginia and Delaware are feeling it and more jurisdictions will feel it as neighboring states add or expand gaming. Nevada is a good model for studying most things in gaming and here, too, Nevada has experienced a dramatic change in the environment when gaming expanded in near-by states. When Indian gaming opened in Arizona, California, New Mexico, Oregon and Washington, gaming revenues in Nevada stopped growing and in some cases began a long, slow decline, except, of course, the legendary Las Vegas Strip – which seems to exist in a parallel universe and is not subject to forces that shape the rest of the gaming industry.

Like Aesop's goose that laid a golden egg a day, it's only a matter of time before the revenue greed of Pennsylvania, New Jersey, West Virginia, New York and other states kill its modern-day counterpart. The Associated Press reported that 2007 was a bad year for Atlantic City's casinos. For the first time in 28 years, casino gambling, which started in 1978, declined, showing a 5.7 percent decrease from the previous year… New Jersey officials didn't have to look far to find the main reason for the decline. The AP reported most of the damage was done by the opening of slots parlors in Pennsylvania and New York, which drew day trippers who were once Atlantic City's exclusive domain… Maryland is looking at legalizing slots, and West Virginia has upgraded…to table games to counter Pennsylvania's slots parlors. New Jersey's results show why West Virginia so quickly added table games to its gambling mix. While slots revenue in Atlantic City fell 8.9 percent in 2007, table games revenue was up 3 percent. And given the pressure to keep taxes down, how long is it going to be before Ohio officials tap into the slots goose that is laying golden eggs for its neighbors? But this gambling goose isn't going to be able to lay enough eggs to meet the demands of the states that claim ownership. (Allegheny Times, 1-15-08)

Is the party over for Kansas City's riverboat casinos? Revenue growth of 0.08 percent, to $720.7 million, was flatter than a pancake in 2007. Admissions were down 9.1 percent. And that's the good news. The bad: Glitzy resort casinos are being considered for Wyandotte County and three other Kansas locations, along with hundreds of slot machines at Kansas race tracks. Missouri casinos also could face a ban on smoking, and the threat of more casinos at Sugar Creek and other locations around the state. In short, the local gambling marketplace appears on the brink of fundamental change… With a national recession also possible, the brightest light in the Missouri casino picture is the prospect of removing Missouri's $500 loss limit… Clearly, the days are numbered for the Missouri-based slot monopoly in Kansas City, currently at 8,161 machines. (Rick Alm, Kansas City Star, 1-17-08)

Bondholders in Connecticut's Mohegan Sun and Foxwoods Resort Casino, the nation's two biggest casinos, may be the losers and shareholders in Las Vegas Sands Corp. the winners if Marilyn Souza has a choice. Souza, a retiree from Franklin, Massachusetts, treks 90 miles almost every week to gamble at Mohegan Sun, operated by the Mohegan Tribal Gaming Authority. ``I'd rather see Massachusetts get the money,' said Souza, 57… Bondholders in Trump Entertainment Resorts Inc. in Atlantic City, New Jersey, saw a decline in the value of their holdings in 2007 after six slot-machine parlors opened in neighboring Pennsylvania. Ebitda for Trump's three Atlantic City casinos may have dropped 3 percent last year, estimates compiled by Bloomberg show… The Mohegans and the Mashantucket Pequot Tribal Nation, owner of Foxwoods, currently obtain about 25 percent of revenues from Massachusetts gamblers… Mohegan Tribal Gaming's $150 million of 6.875 percent debt due in 2015 have fallen to 93.6 cents on the dollar from about 101 cents at the beginning of last year, according to data compiled by Bloomberg. The debt yields 8 percent. The Pequot tribe has $500 million of 8.5 percent notes due in 2015. The bonds have fallen to 99.8 cents from 100 cents when they were issued in November. The debt yields 8.5 percent. (Oliver Staley, Bloomberg, 1-17-08)

But when thousands of new slot machines open for business at the state's horse-racing tracks this summer, all bets will be off. The "racinos" going in at Anderson's Hoosier Park and Shelbyville's Indiana Downs…no one may feel the pinch more than the French Lick Resort Casino…French Lick, the state's newest casino…Hoosier Park and Indiana Downs agreed to pay the state $250 million in licensing fees to install the profitable machines. Each track is permitted to install up to 2,000 slot machines. Other Indiana casinos have between 1,200 and 2,500 and add more and replace others every few years… The tracks' facilities will represent a 16.5 percent increase in Indiana's supply of slot machines…"We're going to take a hit of 20 to 25 percent on our business," said the vice president of sales and marketing. (Erika D. Smith, Indianapolis Star, 1-28-08)

Gaming operators in Laughlin and Reno are frequently blamed for their own declines. If they only spent more, expanding and upgrading their facilities and on marketing and advertising, they could reverse the declines. Over the last two months, we heard the same thing about the Tropicana in Atlantic City – the owner's cheapness, and not the slot machines in Pennsylvania, is the root cause of the property's problems. Well, over the next year or two, we will get to see many different responses to the pressure of competition. In some jurisdictions the major response will be regulatory as states expand their own gaming offerings to offset the competition; in others it will individual. In Atlantic City, billions of dollars will be spent in the next five years in an attempt to replicate the Strip's success in fighting off competition and to meet Wall Street's unending demand for growth every quarter, every year, until the end of time. One thing is certain – the expansion of gaming has not reached its conclusion, and very few jurisdictions or casinos will ever again experience the competition-free and endless growth that both Nevada and New Jersey had enjoyed.

At least three casino operators are pursuing luxury resorts in Atlantic City even as the East Coast gambling mecca is reporting its first annual decline in gaming revenue since the first casino opened there in 1978… The closest comparison to the trend in Atlantic City is the spread of tribal casinos in California… Though some wonder whether Atlantic City's proximity to multiple gambling markets will make it hard for the city to rise much beyond its roots as a gambling fix for day trippers, others say the city is primed for Las Vegas-style growth. Here's what's in store for Atlantic City: MGM Mirage is planning a $5 billion resort with at least 3,000 hotel rooms called CityCenter East; Revel Entertainment, with investment bank Morgan Stanley, is proposing an oceanfront resort with two hotel towers of 1,900 rooms each; Pinnacle Gaming, which bought and imploded the old Sands casino in Atlantic City, envisions a major resort there. (Liz Benston, Las Vegas Sun, 1-28-08)

MGM is gearing up for its latest project. After announcing back in October that it plans to open a giant casino-resort in Atlantic City, N.J. MGM is taking the necessary steps toward achieving that goal. On Tuesday, the Las Vegas-based casino operator filed an application with the N.J. Department of Environmental Protection's land-use regulation program asking for a Coastal Area Facility Review Act permit… The MGM Grand Atlantic City is slated to be built on a 72-acre lot just next door to the Borgata. Plans include a 3,000 room hotel facility… The casino will hold 5,000 slot machines and 200 tables. (Melanie Lindner, Forbes, 1-15-08)

The bidding for Atlantic City's Tropicana Casino and Resort officially began when Colony Capital LLC…recently offered $850 million for the casino-hotel complex… Published reports suggest that some two dozen potential bidders are in the mix; to date, only a handful have been identified by industry speculation… Gomes + Cordish Gaming Management LLC: Logic suggests this teaming of veteran Atlantic City gaming executive Dennis Gomes and Baltimore-based commercial developer Cordish Co. should be the winning exacta…Colony Capital LLC: Its bid came out of the blue…a veteran management team and its parent company's resources suggest the company should be taken seriously…Mohegan Sun: is a top-shelf operation, and whose Wilkes-Barre, Pa. slots parlor is number-one on the East Coast in per-machine revenue… Steve Wynn… Should he win the bidding, there's no question he'd raze the Trop and build an uberproperty. But it's hard to believe the state would sanction the loss of 2,100 hotel rooms for the four or five years it would take Wynn to complete such a new project… Pinnacle Entertainment Inc: May have disqualified itself when it bought, and subsequently demolished, the Sands in preparation of creating a planned $1.5 billion hotel-casino…Ameristar: Ameristar Casinos; Penn National Gaming: These are two smaller gaming companies with no experience in major casino jurisdictions…Which means they should have no chance at all. (Chuck Darrow, Courier-Post, 1-15-08)

That does not mean that gaming is dead. It does not mean that casinos can no longer be profitable, and it does not mean that casinos as a source of state revenue are no longer viable. But it does mean that investors, operators, and regulators should start to be more conservative in their expectations.

The results are in for December, and most states showed a decline. The one major jurisdiction, and that is an international one, to show dramatic growth without any significant competition was Macau.

Atlantic City December gaming revenue fell 10.6% to $371.2 million. (Reuters, 1-21-08)

Colorado casinos' December revenue rose 7% to $58.3 million. (Gaming Industry Weekly Report, 1-28-08)

Detroit December gaming revenue rose to $113.6 million. (Reuters, 1-21-08)

Connecticut December slot revenue plunged 18%. (Gaming Industry Weekly Report, 1-21-08)

Illinois December gaming revenue was down 5.8% to $155 million. (Gaming Industry Weekly Report, 1-14-08)

Indiana December gaming revenue fell 9.3% to $204.6 million. (Gaming Industry Weekly Report, 1-14-08)

Iowa December gaming revenue fell 7.2% to $105.6 million while same store revenue was down 12.2%. (Gaming Industry Weekly Report, 12-14-08)

Louisiana December revenue rose 2.3% to $228.1 million. (Gaming Industry Weekly Report, 1-21-08)

Macau 2007 casino revenue rose 46% to $10.3 billion. (Gaming Industry Weekly Report, 1-28-08)

Mississippi December gaming revenue rose 0.2%. (Gaming Industry Weekly Report, 1-28-08)

Missouri December gaming revenue fell 7.3% to $129.8 million. (Gaming Industry Weekly Report, 1-21-08)

Nevada November gaming revenue fell 14% to $981 million. (Gaming Industry Weekly Report, 1-21-08)

Ken Adams

Ken Adams is the principal in the gaming consulting firm, Ken Adams and Associates. Formed in 1990, Ken Adams and Associates specializes in information, analysis, and strategic planning for Indian tribes, casino operations and gaming manufacturers.

Ken spent over 20 years in the hotel-casino industry, prior to founding Ken Adams and Associates. He held the positions of: Director of Casino Operations, Casino Manager, and Keno Department Manager. During this time, he developed numerous innovative marketing and customer development programs and systems for evaluating casino performance. Some of those programs, such as slot clubs and tournaments, have become industry standards.

Ken is also actively involved in gathering and disseminating information that is important to the gaming industry. He is editor and publisher of and the Adams' Report, a monthly newsletter specializing in identifying trends in casino gaming, regulation and manufacturing, the Adams Daily Report, an electronic newsletter that provides electronic links to the key gaming stories of the day, and the Adams Review, a special report distributed by Compton Dancer Consulting that provides editorial commentary on gaming trends.
Ken Adams
Ken Adams is the principal in the gaming consulting firm, Ken Adams and Associates. Formed in 1990, Ken Adams and Associates specializes in information, analysis, and strategic planning for Indian tribes, casino operations and gaming manufacturers.

Ken spent over 20 years in the hotel-casino industry, prior to founding Ken Adams and Associates. He held the positions of: Director of Casino Operations, Casino Manager, and Keno Department Manager. During this time, he developed numerous innovative marketing and customer development programs and systems for evaluating casino performance. Some of those programs, such as slot clubs and tournaments, have become industry standards.

Ken is also actively involved in gathering and disseminating information that is important to the gaming industry. He is editor and publisher of and the Adams' Report, a monthly newsletter specializing in identifying trends in casino gaming, regulation and manufacturing, the Adams Daily Report, an electronic newsletter that provides electronic links to the key gaming stories of the day, and the Adams Review, a special report distributed by Compton Dancer Consulting that provides editorial commentary on gaming trends.