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Expansion, Consolidation, Proliferation and Profits Pushing Gaming
 Industry into a New Phase of Development Focused in Las Vegas 
By Rod Smith, Las Vegas Review-Journal
Knight Ridder/Tribune Business News

Aug. 1, 2004 - Around and around they go, and where they stop, nobody knows.

Four pivotal trends that together will seal the fate of Las Vegas are all spinning at once -- expansion, consolidation, proliferation and the profits they generate.

Like wheels of fortune, there's little telling how long they'll whirl. But, for now, the odds suggest luck is herding gaming operators back home after 25 years of heavy investments in new jurisdictions, starting with Atlantic City.

Each of the four trends is pushing the gaming industry into a new phase of development and combined they are propelling expansion focused in Las Vegas.

"What we're looking at is really the maturing of the gaming industry as a major American business," said Hal Rothman, history department chairman at the University of Nevada, Las Vegas. "It's been a kind of renegade industry. What we're seeing now is what industry does when it reaches maturity and it's dictated by the response of the financial markets to opportunities and products."

EXPANSION: The 10,000-plus hotel rooms just completed, under way or planned on the Strip are a huge expansion and dwarfs growth anywhere else in the country. And there's more to come in the next few years.

MGM Mirage Chairman Terry Lanni said the expansion is largely a response to increased demand, which, in turn, is the result of the national business cycle and the current economic recovery.

"Suddenly, people are very excited (because they have free cash and leisure time)," he said. "That gives them more ability not just to spend more but to come in greater numbers. And the focus (for vacations and business meetings) is very much on Las Vegas (so they are coming here)."

American Gaming Association President Frank Fahrenkopf said the expansion is also a function of Las Vegas reinventing itself and emerging from the damaging aftereffects of the Sept. 11, 2001, terrorist attacks.

It's not just about gambling anymore. It's about being hip and cool. It's about attracting a new class of visitor that is looking for top-quality rooms and the amenities that go with them, Fahrenkopf said.

Through several previous cycles, new casinos have created their own increased demand, leading to ever more visitors and profits, Rothman said. But this cycle is different, because really only developer Steve Wynn has a new and innovative resort coming online, he said.

The other projects -- the Venezia Tower at The Venetian, the planned Palazzo resort adjacent to The Venetian, The Hotel at Mandalay Bay, and the new Bellagio and Caesars Palace towers -- are all largely expansions to catch up with demand or expected demand.

Investors are committed enough to be spending around $6 billion for the projects, but they want even more to boost their returns on investment. That is a major reason for the big mergers just completed and recently proposed.

CONSOLIDATION: The first sign of mergers to come and the first big buyout this year was the recently completed $1.3 billion deal between Boyd Gaming Corp. and Coast Casinos, which consolidated the locals gaming market.

Then came the June proposal for MGM Mirage to buy Mandalay Resort Group for $7.9 billion, followed quickly in July by Harrah's Entertainment's plan to buy Caesars Entertainment for $9.4 billion.

Harrah's President Gary Loveman said in a recent conference call that it has been clear "for some time" that the gaming industry will ultimately consolidate into two leading large-cap operators, repeating a trend in other consumer businesses.

However, he added that having two large players with complementary strategies is conducive to long-term growth.

Analysts said Harrah's-Caesars, which is geographically diverse and is banking on database mining, and MGM-Mandalay, which is more Las Vegas-centric and is betting on becoming the General Motors of the gaming industry, fit Loveman's model for complementary competition.

But Rothman said the competition will be fierce and will generate its own investment boom for the rival companies. Analysts also said consolidation will create opportunities for niche operators such as the Palms, Hard Rock Hotel and Terrible's Casinos, especially in Las Vegas.

Rothman said this is no different from other industries.

"Think Coke and Pepsi. But it also creates niches ... for the likes of the Maloofs (who own the Palms)," he said.

Fahrenkopf added: "It's all a sign of the maturity of our industry. Look at almost any other industry. There's been tremendous consolidation. Economies of scale just make sense and it's the public that benefits."

However, University of Nevada, Las Vegas professor and casino industry expert Bill Thompson said the gaming industry is not maturing in the way other American industries have.

"Some mature industries -- Detroit cars -- were happy, fat and sassy and just enjoyed prospects of moving into retirement in a big pink Cadillac. Then Japan kicked butt," he said. "This is not the Las Vegas maturity model. It is one of renewal and revitalization at the time of maturity, seeking greater returns by activity by new investments, new combinations, embracing new ideas."

This spirit of new investing is especially true in Las Vegas, where risks, considering the friendly tax environment, are low, he said.

PROLIFERATION: Casino operators have lost their zeal to push politicians to legalize new forms of gambling or introduce gambling in states where it is now prohibited. The casino operators are adamant about avoiding taxes they find unreasonable or extortionate.

On top of that, the business imperative for higher returns, and gaming companies' establishment of feeder networks to lure customers from other areas, has the expansion of gaming in fast retreat across the country.

"(Gambling companies) no longer need to expand everywhere. It's a big business and people cross state lines. Why should they go into new jurisdictions that may be hostile when they don't need to (just to create customers) anymore," Rothman said.

Faltering proliferation will likely further boost the investment boom in Las Vegas, where gaming companies enjoy the friendliest tax and regulatory environments in the country, industry insiders said.

MGM Mirage's Lanni said that for just these reasons his company is limiting its investment horizon to Nevada, Mississippi and New Jersey, "states that have said this is an important industry."

PROFITS: In the end, the new focus on Las Vegas boils down to profits and returns on capital. Returns on gaming industry investments have slipped over the past 15 years from 20 percent and 25 percent to only about 10 percent today.

Deutsche Bank analyst Marc Falcone said the increased cost of development and added competition caused declining returns.

Still, investors like the gambling industry in general because its yields beat out almost every other business. Investors also like Las Vegas and the Strip because of their cachet: Las Vegas is seen as hot and hip, which is creating a surge in business and leisure travel. Low taxes also curry investors' favor, he said, thereby boosting bottom lines.

Susquehanna Financial Group gaming analyst Eric Hausler said than when corrected for tax and regulatory risks, Las Vegas has quickly become the destination of choice for investments in the industry, he said.

"If you're going to put a lot of money in the ground (by building new hotel-casinos), you can be sure Nevada will treat you well," Hausler said.

He said the industry has to grow to keep Wall Street sated. He added that growth will be fastest if the industry builds more hotel-casinos on the Strip, where returns are doing best.

Hausler also said growth will accelerate as the industry consolidates and increases the pricing power of a smaller number of surviving companies and spread overhead.

-----To see more of the Las Vegas Review-Journal, or to subscribe to the newspaper, go to http://www.lvrj.com.

(c) 2004, Las Vegas Review-Journal. Distributed by Knight Ridder/Tribune Business News. For information on republishing this content, contact us at (800) 661-2511 (U.S.), (213) 237-4914 (worldwide), fax (213) 237-6515, or e-mail reprints@krtinfo.com. MGG, BYD, MBG, HET, CZR, RANKY, RNK, KO, PEP,

 
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