Tuesday, January 23, 2007

Casinos Divide to Conquer

Interesting bit in today's WSJ (subscription req'd) about breaking casino companies into essentially their constituent parts - land companies and gaming companies, ala the hotel breakups of the recent past that turned Marriott and Hilton into managment companies as opposed to being necessarily operating companies. It started me thinking about why this may (or may not) work. These proposals seem to be based around the soaring property values on the Las Vegas Strip. However, I don't see how separating real estate from relationships is as easy as separating alpha from beta, at least in this business.

For one, and maybe I'm being the spoil sport here, but doesn't this create more overhead for the casino management companies? Say, for example, if MGM Mirage were to break off its real estate operations into a separate company which owned the actual physical land. MGM now has to pay reasonable, if not market, rates to the real estate company so that the real estate company can cover its costs. It gets worse if the debt stays with the real estate, as mentioned in the article, because the REIT, or whatever form the real estate operations take, has to have the cash flow for debt service.

Another point of concern is the licensing. This may not be as big of an issue, but it still something that needs to be considered. The hotel and resort operations are one piece, but the proper people have to be licensed to run the actual physical casinos. Presumably that is what the casino operating company would handle. Of course, I could be off base.

On the whole, I'd say that this kind of model doesn't seem to fit the casino business all that well. That's not to say some PE shop might not try it. However, the casino business is much more a relationship management business these days, as the article points out about the Harrah's buyout. Getting the regulars to come in and continue spending is the backbone, and the glitz and big spenders is an add-on. Separating the relationships from the facilities might look good on paper, but it sounds like a losing proposition to me.

Also, what happens when the leases come up for renegotiation? What if the REIT or whatever decides that it can get a better deal from a rival or startup operator? Would you feel the same about your favorite resort (mine is The Venetian, right now anyway) if it had to move to another location, a location that most likely would be off The Strip given the relative dearth of available land ON The Strip these days? What does that do to the hotel/casino operator's numbers when they get this kind of deal foisted upon them? I'm not saying its likely, and I'm sure (I hope) the leases are long enough to make it profitable during the term of the lease and provides options after the expiration of said lease. But the REIT could also decide to develop condos or apartments or something non-casino, and it would be well within its rights to do so. It just doesn't look like a winner to me.

But then, what do I know?

1 comment:

molly said...

Interesting, yes.
I also fail to see where the value is supposed to be coming from in such a split.