Atlantic City has moved back onto gaming’s center stage in February, there was bad news and good news from the Boardwalk. The bad news first, the city’s casinos reported a 13% decline in gaming revenues in January, the city’s casinos generated barely over $200 million, that was 22% less than casinos in Pennsylvania generated and Revel officially declared bankruptcy. However, even with the dismal financial news, there is some surprising and positive news. Two Atlantic City casinos are in the process of being sold and another major gaming corporation has decided to stay in town.
Meruleo Group, which operates the Grand Sierra Resort in Reno, made an offer of $20 million for Trump Plaza; poor Trump, his image is tarnished, just two years ago Trump Marina sold for $38 million. Casino prices are dropping dramatically and in 2013 the Plaza is worth much less than it cost The Donald back in the glory days of Atlantic City.
Online gaming operator, PokerStars has offered to buy the Atlantic Club. No price has been given, but it is likely less, much less, than current owners paid for it; as Bobby Dylan famously sang – “the times they are a changing.” The Atlantic Club was built by Steve Wynn; he called it the Golden Nugget and in his time was it top earning casino in town; Steve sold it to Bally Manufacturing for $440 million and left town. Under Bally the property was called the Bally Grand; Bally Entertainment and its casinos were purchased by Hilton Corporation. The AC property was renamed the Atlantic City Hilton. Hilton Corporation sold it to Colony Capital as part of a bundled of three casino properties for $1.24 billion. Colony had to rename the property after losing the rights to the Hilton name, thus the current Atlantic Club. A comparable price to the Plaza, $20 million would be 5 percent of the price Bally paid in 1985. That may sound like bad news, but it is good news that there is a buyer, MGM was not so lucky.
MGM has decided it does want its license in Atlantic City; MGM is a 50 percent owner of the Borgata with the Boyd Corporation. MGM asked the Division of Gaming Enforcement to renew its gaming license and the DGE is allowing MGM to reapply for the license; there is no guarantee it will be granted, but the is no guarantee that PokerStars or Meruelo Group will be licensed either. However, given the difficulties the city faces, the DGE is certainly motivated to find reasons to grant a license rather than reasons to deny one.
But why would anyone what to buy a casino in Atlantic City under today’s conditions? Several people have asked me that question. In my mind, there are at least three reason; for example, when Carl Icahn bought the Tropicana for $210 million in 2010, he was doing what he always does, speculating. Icahn is a patient investor, he buys at what he considers a good price, although I would guess he has rethought the Tropicana purchase. Then he simply holds it until he can sell at a better price; Icahn also bought an finished casino in Las Vegas with no intent to complete the construction – he is just waiting. The Tropicana was Icahn’s second investment in the AC and he certainly made money with the first one.
MGM probably has another reason; MGM is in the process of bidding on casino licenses in Massachusetts, Maryland and Toronto in Canada. It does not want or need any black marks on its record at this time; oh, and no one has been willing to buy its 50 percent ownership in Borgata so there are not many options.
PokerStars reason is not unlike that of MGM, it needs to clean up its record in the United States and be licensable in preparation for the legalization of online gaming, both nationally and in New Jersey. That leaves Meruelo and Trump Plaza, why would anyone in their right mind want to buy anything in Atlantic City, much less something Trump had owned? Trump is well-known for failing to maintain his properties and for failing to keep up with changes in products and services – for Trump it was all in the name, nothing else was necessary.
Meruleo appears to be doing exactly what it did in Reno – buy a property for the right price; the right price being the one at which the property can make money as it is and with the revenues it currently generates; the purchase price lowers the debt and the debt service thereby creating a more positive cash flow. The new operator usually plans to restructure the costs, improve the products, services and promotions. Under those conditions increases in revenues created by the changes simply add to the profits.
Of course, that assumes the price is right and the revenue stream will remain at its current level; that was a very reasonable strategy in Reno, Nevada. Reno has absorbed, or nearly absorbed all of the competition in its feeder markets. Revenues are nearing the point of stability in Reno, with the exception of one major casino being built near San Francisco, there are no new casinos on the horizon. Atlantic City is a horse of a different color.
Revenues in Atlantic City are still dropping significantly; and worse, there is additional competition coming in Massachusetts, Maryland, New York, New Hampshire, Rhode Island and Philadelphia in near-by Pennsylvania. Atlantic City will not stabilize for years, not until all of those casinos are built and have been operating for at least a couple of years.
There are lots of reasons one might buy any business – additional opportunities for growth and expansion, speculation and the right time, location and price are the most common and all of those make sense. But, there is one final reason that a person might buy a troubled business, during troubled times in a troubled location – brains or as the rest of us might say arrogance. It sometimes happens that a buyer thinks he is smarter than all those that came before him and whatever caused the downfall of his predecessors will not affect him. That is the most dangerous and risky strategy. However, I don’t think arrogance is the strategy being used by MGM, PokerStars or Meruleo.