GLG News by William Sherlock

Implications: The results that ahve been produced by WYNN for the last quarter is going to be indicative of what we see in the near term future.

Analysis: Wynn's results really reflect what will be happening to the bigger casino companies for the near future. Wynn is building Encore in Las vegas, due to open in late 2008. As has been noted, this will be a challenging time to bring new product into the market. But let's look at several other companies that have a presence in the far east. The Las Vegas Sands company is almost a mirror image of Wynn. They are in Macau, in a big way, and just recently opened the Palazzzo, a sister property to the Venetian. Now all the reports I have heard have been rather uninspiring relative the Palazzo. Most observers believe that the new property will cannibalize the Venetian more than aid earnings. Where the LVS company has also been saved, from an earnings standpoint, is from the Macau property. MGM Mirage, will most likely reflect the same scenario, adding new product to las Vegas in the form of City Center, and having what I am assuming will be significant earnings from Macau. So it will be very interesting to see these 3 companies future earnings with each of them in various degrees of the same scenario. To summarize, each company is bringing or has recently brought new product into a flat or declining short term market (Las Vegas) but have the luxury of a significant revenue offset from Macau. As long as Macau holds up and there is no current reason to believe it wont, It looks like these 3 companies laid a good bet.

Implications: Detroit casinos may have an advantage relative to competition in not absorbing huge losses of business due to a smoking ban.

Analysis: Detroit currently sits in a market that has very little competition, therefore they should( key word, should) be able to maintain most of their business when they go no-smoking. A couple of situations bear reviewing before we say that the market wont suffer any kind of revenue shortfall. If you look at the history of states going non-smoking and the impact, you will see many diffeent results. Delaware, the revenues declined for the first 12-18 months and then returned to previous levels (the assumption is that these customers went to Atlantic City). North Carolina, the Cherokee casino suffered year over year declines for about 1 year after the smoking ban began. Now this is interesting because, where did these customers go, there was no competition for hundreds of miles (think Detroit). When Atlantic City went to a partial ban, it was hard to figure out if they lost business due to the semi-ban or because of new Pa. competition. Colorado has invoked a smoking ban and throughout the state have seen double digit declines and the question is where have these customers gone?(have they really decided to fly to vegas just to smoke?). Again, this may be a good comparison to Detroit. I think the outcome is truly uncertain for Michigan and only time will tell which direction the revenues will flow.

Implications: Penn National Gamings Board of Directors has made the decision not to allow the private equity firms to re-price their offer

Analysis: Penn National Gaming will be staying public, at least in the short-term due purely to the credit and stock market situation. Let's take a close look at Penn National's gaming markets and what is ocurring in those markets relative to when the original offer was received. Basically, Charlestown is doing just fine (flat ebotda year over year in a tough economy, 1st qtr 2008), Lawrenceburg is only down slightly while the Illinois properties are all disasters due to the the no-smoking ban invoked by the legislature, hardly Penn's fault. their other properties in Iowa, Mississippi and even Maine held up fairly well and with an expansion in Maine should do fine. I have opined in the past, that i think the regional markets will hold up better than the destination markets and thus far that appears to be correct. Penn has opened their slots at the track property in Pa. and the numbers look pretty good and so this actually will be a further catalyst of improved financials. So, why did the deal go south? Well, first, it appears that the Penn Board did not want to discuss any lesser price than the original 67 a share (pretty gutsy considering the stock is in the 20's). Second, it is obvious to everyone that the credit markets stink and so this deal was shaky for awhile at the current 67 price. Finally, the stock is being unduly punished by people who have not looked at penns outstanding fundamentals, a good management team, good properties in good markets and a decent development plan. I still believe that Penn and Ameristar are 2 fairly good investments at current prices as they operate in regional markets and do it well. It also appears that Penn will enter the a/c market and with the experience of their senior management in the market previously, they should be extremely competitive. I will admit that I thought a mid to low 50's stock price sale would be the final outcome but obviously I was wrong on this one!

Implications: Aliante Station will present challenges for Stations but not any that they can't overcome.

Analysis: Aliante Station will open late this year and add another quality property to the Stations empire. My understanding is that Aliante will join Red Rock and Green Valley Ranch in the upper tier of the companys porfolio. The risk that Stations faces is that they are adding inventory into an already staggering market. The locals market has seen high single and low double digit declines over the past 4 months and it doesn't appear that that trend will soon reverse. The second issue for Stations, is that they will be in the Santa Fe Station market (at least partially) and how much will that cannibalize their business. Santa Fe Station has actually been one of the companies better performers over the past several years and it will be interesting to see how Aliante effects it. The broader picture is that Stations continues to implement their vegas strategy of circling Las Vegas. The next project on the board is Durango Station which will be located in the southwest quadrant of the city and should really complete the geographic locationing of Stations in the valley. I think short term, like everyone else, Stations will be challenged relative their numbers but long term they will be in a prime position to rebound quicker than most

Implications: Barry Milligan brings up some excellent points in his analysis of Harrahs

Analysis: Barry Milligan makes some good points with his outlook on Harrahs Entertainment (Caesars Entertainment). Let's look a little further into the future and see what the company has in store for us. I believe that Harrahs will look to dispose of some of their properties in the markets in which they already have and would continue to have a significant presence. This really brings us to the 2 preeminent gaming locations in the US, Las Vegas and Atlantic City. Let's start with the easier one, Atlantic City. Harrahs currently owns the Harrahs Marina property, with a brand new hotel tower and the preferred neighborhood, no sale there. Caesars Atlantic City, well they just renamed the company Caesars so safe to say, no sale there. Bally's Atlantic City, they have let this property run down from a physical plant standpoint, so maybe this property heads to the sales showroom in the future. The showboat, definitely heading to the sales showroom as quick as the credit markets will allow, no significant reinvestment and the highest slot hold percentage in town, formula for a sale. Harrahs Chester in Pa, new and doing well not for sale.

Las Vegas, you have to imagine that Harrahs wants to keep the entire block from Harrahs south through Bills casino which encompasses Imperial Palace, o'sheas, the flamingo and Bills.  This could be the location where something really large is created to rival City Center

So we are left with Caesars Palace, which will not be sold, Bally's/Paris, which if they were not built to be symbiotic,  then Bally's would be gone in a minute and the RIO. Ahh, the Rio,a property Harrahs management has never really figured out how to market and manage, so I think this may go to the sales showroom as well.

So, Harrahs can start to mitigate some of their exposure by selling off the Showboat, the Rio, and possibly Bally's Atlantic City. This will provide them with Billions in cash, while still maintaining a major presence in each market. Now if the credit markets would only start to loosen up.......                                                                      

Implications: Whenever a Native american tribe wants to build a casino, this is how it always plays out

Analysis: How many times have we seen this story? And in how many different communities and states? The anti-casino people always go for the same 4-corners offense (slow down the game until it is over). What the game is, in no particular order is, Government, utilities and traffic.

First, the opponents count on the environmental study to come out with an unacceptable rating, if this fails, it is time to squeeze the utility companies. The water, electricity and gas needed to operate any facility now becomes a political issue as to whether they can properly service their existing customers as well as this huge behemoth. Next up, Can the transportation infrastructure take ALL THIS ADDITIONAL TRAFFIC? From what I read this is a rural road and with small modifications could probably take significantly more traffic. This has happened throughout the country and you rarely hear of huge traffic jams around casinos, do you? Finally, if all else fails, the anti-casino people will protest that this land or reservation is really not the tribes ancestral (where they can prove that the tribe existed in the area) land and therefore the whole deal needs to be revisited, back to square one.

Lakes entertainment is a competent management company and I am sure they have reserched all this prior to making any agreements with the tribe. All these deals take a great deal of time but if they come to fruition, they are home runs!!!

Implications: The companies that have multiple properties in Las Vegas have an interesting dilemma

Analysis: I have spoken about this in various forums before but I see an interesting situation arising relative to companies with multiple properties in las vegas. Those companies that manage huge databases are actually cannibalizing themselves to an extent. Here is what I mean. Let's say that you are a Bellagio player and your win/loss per day is 5k and let's assume that in the past that made you a Bellagio customer. Now for whatever reason, recession problems in your business, gas prices, or foreclosure problems in your market, you cut back on your trips, what do you think the Bellagio direct marketing people are going to do. Basically they will say we are not getting enough 5k players so let's go down to 3k players and direct mail them an offer. This player (3k player) gets excited because he always got his offers from the Mirage (same company) but now he goes to the Bellagio. Now the Mirage people say well we have to go after the 2k customer because our 3k customers are going to Bellagio. Well, this 2k customer was a NYNY customer (same company) and now he upgrades. The essence of the story is that the odd men out are the lower end casinos of the particular company such as, Luxor (until they are done rehabbing the place), Excalibur and circus-circus get the remains of the database. So this is really what I mean when I say that these multiproperty companies are somewhat cannibalizing themselves. This would hold true for stations, boyd and harrahs as well. Very interesting as the rates continue to fall and promotions continue to rise to see how the bottom lines are effected.

Implications: The hospitality industry is and will be facing an increasingly tight market in which to operate

Analysis: The real dilemma that is facing the hospitality industry for this recession is the same as in the past recessions except for just a few differences. First, the issue is, what kind of facility did I build and what do I need to do to keep it profitable during this difficult period. What I mean by that is if you built a higher end property then to what extent are you willing to compromise your room rate and potentially the type of clientile that you place in that room. If your hotel has high end restaurants but you have dropped your rate dramatically just to fill the property then you may see your revenues fall in all categories. The other factor that must be considered is, what is the expense to maintain a guest room? If it is a higher end room then your room rate compromise may be mitigated by the expense to clean, place the amenities and other miscellaneous expenses. The real challenge is to find the right mix of acceptable room rate and what level of occupancy that provides. There are ways to limit expenses by condensing the property. What I mean by that is to close whole floors and room your customers on the floors you keep open, you will reduce the travel time of the room attendants as well as reduce supervisory personnel. It will be a difficult period for hotels but the better managed properties will survive and live to raise room rates another day.

Implications: I think Nelson is right on target

Analysis: In brief, two items occurred which will make the completion of the Penn deal a reality. Number one is the Trump Marina deal which reflects a very high multiple and even a reasonable multiple if you take the Marina's 2007 EBITDA (40 milliom/ about an 8 multiple), this reflects well on the industry. In addition, PENN is a quality gaming operator with quality management overseeing those operations. I have always thought the deal would happen, the question remains, what price. A renegotiated price in the high 50's might seem reasonable to all parties and then Penn can concentrate on moving into Atlantic City, one way or the other.

Implications: I think Wynn has a great business plan however I believe he needs to review the terrain and understand that he is not alone

Analysis: What Wynn is proposing is a TON of convention space. If you think about it, Has Wynn or his current set of executives ever operated such an expansive amount of space? I think not! In addition The Fountainbleau will have significant meeting space as will Cosmopolitan which aids Echelon and City Center respectively. The entire city of Las Vegas is beginning to evolve to possibly an overdependence on
conventions and company meetings. This is similiar to the "family attractions" which failed and now what is occurring with the recession today. It used to be that vegas was "recession resistant" but as the city has evolved to more and more Non-Gaming revenues, it becomes more prone to a recessionary environment. The public will withhold Food and Beverage, Retail and Entertainment revenues to preserve for Gaming as well as fight like hell for the lowest room rates. Dare I wander too far from the article subject Wynn is always one step ahead of everyone, whether it is quicksand we will have to wait and see....

Implications: MGM Mirage has the right approach to the current economic environment

Analysis: MGM Mirage has really got their head on straight as they approach the current economic climate. In my mind MGM has the finest management team at the corporate level as well as at the individual property level. They are currently spending money in an expansive way to upgrade and update the properties they bought from Mandalay (Luxor, Excalibur, Mandalay Bay). Have spent significant money at the Mirage and basicly have decided to proceed with these rehabs in the face of a downturn therefore having superior product available when the inevitable economic rebound occurrs. In addition, MGM is committed to buying back their stock and have stated that their non gaming arm of the company will be aggressively expanded and who knows, in the future, may be spun off as a separate company. This group has a great development pipeline, be it the Kerzner partnership, an AC property or the city center property in vegas. All in all, this company is the shining star of gaming and will be the leader in the rebound of gaming stocks

Implications: There are quite a few issues that Herbst needs to address, some they can fix and some they can't

Analysis: Herbst Gaming is in a quagmire as to what to do with their business model. Basically, Herbst has a 4 -pronged business model, southern nevada casinos, northern nevada casinos, sloute routes and midwest casinos. Let's take a look of each of these revenue centers. Southern Nevada casinos, they have no destination property where people would want to earn gaming points to go to (Bellagio, Caeasars Palace, for example) and they have inherent weaknesses in Pahrump (more updated properties), Primm (Indian Gaming, cheaper strip room rates) and Terrible's off the strip which has no vision or quality reputation. They purchased Primm for 10 times EBITDA which now translates, at current earnings to 14 times. The northern nevada market and the Sands Brand, and I am being kind, has very little value. Any quality Indian casinos arriving in this market will devastate the Sands properties. Actually 2/3 of the midwest properties do fairly well and have held up decently in the current economic environments (Iowa being the exception due to new and expanded competition). The slot routes are hurting due to the smoking ban and they have done a good job of getting better deals from their "landlords" however 20% of their business is gone and it isn't coming back. Ron is correct, they need to refinance (good luck) and come up with a solid marketing plan. the good news is their new President has a marketing background and should be able to effectuate some of those needed changes. I wish them well as they are between a rock and a hard place and it isn't going to get any easier in the near future.

Implications: Ron is correct that Scott Butera is the right guy for the job IF columbia Sussex lets him do it.

Analysis:  I would just add another facet to what Ron's written and that is consolidating the company in a manner that allows them to achieve success in the future. Specifically, I would hope to see Scott review the Laughlin and Lake Tahoe markets and decide which of the 2 properties in each market they should keep and then sell the one that is non essential to the company. In the case of Laughlin, one assumes that  the River Palms would be the one to go. In Lake Tahoe, i guess it would be a toss up as to which way they will go. Another area they should look into is whether they can survive in a 3 boat competition in Baton Rouge, La. As I see it they will be the odd man out when Pinnacle arrives on the scene. Penn National has already beat their brains out in that market, so maybe it is time to move that boat or sell it! Scott has his hands full with the disposal of the Atlantic City property and providing a viable vision for the Las Vegas Trop however, I think he should weigh these options and move expeditiously to achieve the desired results.

Implications: Each time a smoking ban is implemented, the results are usually the same

Analysis: It is interesting to look at the history of when smoking bans are implemented and what impact that has on the industries revenues. If you went back and looked at Delaware and their 3 racinos, the north carolina cherokee casino, casino windsor and now most recently Atlantic City you will see similiar results. Each of these markets experienced a decline for 12-18 months (ac is entering month 11) and then the markets sees a rebound back to historical levels. What this means is that there is a stagnation in the market for approximately two years and then the upward migration begins again. Now, not only did Colorado go non smoking but so did Illinois and to a greater extent they have a bigger problem. Let's be honest where are the Black Hawk, Cripple Creek, and Central City customers going to migrate to? I have a great problem in believing that they would jump a plane to vegas just to smoke but who knows. In the case of Illinois they have competition right across the border in Indiana and Missouri, so the probability of those customers moving are more likely. It will take time to truly see the impact of the smoking ban in Colorado, we need to get out of the unpredictable winter season and then take a look at the year over year numbers. I do know that many of the Colorado casinos have added very nice smoking lounges next to their casino area. Whether this is enough to attract their smoking gaming customers to the same level as in the past is yet to be seen

Implications: I have witnessed the mohegan tribe and the mashantucket pequot tribe and their hiring  and promotion practices for 11 years

Analysis: I have worked for the mashantuckets for 11 years, neighbors of the Mohegans and I can tell you that theirs is an orderly way in which they attempt to place their tribal members in various positions. In the pequots case their is an extensive training period that each tribal member must complete and they are graded and signed off by the person who is conducting the training. In addition, the person whose job the tribal member is training for is assured of a position with a like salary. Now I am not saying that at times there is not conflict or some pressure exerted by the Tribal Council, however, if you have ever worked for Trump or Wynn, you get that same kind of pressure. Brad would know better than I how the Mohegans handle their tribal succession program. Everything I have seen reflects a calculated and fairly sensible program. One other note is that you can not lump all tribes together, it depends on several things. The size of the tribe, the age of the tribe, the education levels of the tribal members, all needs to be taken into consideration when a tribal succession program is being considered or implemented.

Implications: Nelson is right on but there are several additional ramifications

Analysis: If Kentucky does indeed legalize gaming then there are several ramifications to various companies. Penn would be impacted in Lawrenceburg but not in Charlestown which really needs to worry about Maryland legalizing slots as that is its main market. Not only columbia susses in Indiana.   but one of the prime Pinnacle properties (Belterra) in southern Ind. would be impacted as well. Harrah's Caesars property would see a dwindling of business in an additional portion of Indiana. French Lick casino has problems which go beyond any additional states legalizing Gaming. As far as winners, don't discount Columbia Sussex getting a casino based on the cool million Bill Yung layed on Gov. Beshear for his campaign. They are ridding themselves of Evansville in any event although now they may not get the multiple they were originally looking for. Other winners in Kentucky would be the companies Nelson mentions but let's not forget the slot manufacturers who will make a LOT of money on new machine purchases throughout the state. It will be interesting to see how things develop

Implications: The Nevada Gaming Industry is more than just the strip!

Analysis: Let's look at the entire picture when analyzing the Nevada Gaming picture. The strip numbers are currently holding up with some help from a favorable hold in Baccarat and Mini-Bacc, however some markets in Nevada are feeling the recession heat. Primm is sucking wind as Native American casinos in southern california and the southernmost las vegas area casinos take bites out of their markets and that is during the pre recession period. The locals numbers have been at best mixed during the past 4 months reflecting a continued pressure from the foreclosure crisis. The red rock/palms portion of the market is reflecting low single digit increases year over year and has shown a slowing of business. The smaller markets such as Downtown, laughlin and Reno are also retracting in the face of higher gas prices, more native American casinos in California and the foreclosure issue in California. I agree with Ron that the mega companies such as MGM, HET, Wynn and LVS should be fine but as he said more from most of these companies having a presence in Macau and not from their Las Vegas properties. The next few months revenue numbers from Nevada will really tell the story whether 2008 will be another year which holds up well under economic pressures. One side note, after visiting several Station casinos I think the body count is definitely down year to year, We shall see

Implications: Columbia Sussex needs to have a strategy to get out of the casino business as quickly and economically as possible

Analysis: It has been well documented by this writer as to my feelings about the Columbia Sussex debacle as a casino operator. If you review any of the public numbers it clearly illustrates a short sighted view of how to operate a casino. Numbers from Atlantic City, Evansville, Baton Rouge all reflect double digit decreases in revenue year over year, month to month. The company is so busy cutting costs (which I agree with to a degree) that they forgot about the second and third areas of concentration. Marketing the property, either through agressive data base mailings or print offerings. Then once you have the customers in the building you need to service them properly so that they will return time and time again. This is where CS has failed miserably as their cutbacks included too many service employees who are the ones who make or break your operations. I believe that the clear path for CS is to rid themselves of all casinos, obtain ONE license in Kentucky and learn how to operate the one casino before attempting to return to the casino industry in any significant way

Implications: Part of the allure of server based gaming is the ability to switch a machine to the customers preferred product , if necessary.

Analysis: Beyond the benefit to the casino companies which is changing the hold percentages, UP or Down from a single port and savings hours of labor expenses , there are customer benefits. The casino can track your favorite slot product game and then if this machine or denomination is not available, they could reconfigure the machines to provide the product you are looking for in the area of the casino in which you wish to play. This makes it a win/win for the casino as well as the customer. The systems will not be ready until sometime in 2009 or possibly even 2010. From what I have seen at the convention in November it appears that WMS has the superior product at this time however I am sure the other slot providers (IGT and Bally etc.) will be hot on there heels. In addition there must be cooperation between slot companies to allow the server based product be utilized between different companies slot machines. This is an exciting development but one that should be embraced by all parties.

Implications: I think columbia sussex has declined in statue to a new low in the gaming business

Analysis: Not since the absymal opening of the Stratasphere Tower by Grand Casinos has there been a poorer company performance than Columbia Sussex in the gaming business. I have watched Columbia Sussex take their newly acquired gaming properties and reduce them to run of the mill properties. In fairness to CS, they had no experience in operating these properties and the Unions were after them from day one. I believe that you will see tremendous pressure placed on Columbia Sussex by regulators in not only Nevada but Indiana and Loiusiana as well. Once again, in fairness to CS they were denied the license in NJ because of various shortcomings (which is understandable) and loose testimony (Which is not). In any event, the regulators will be watching this company closely and if they continue to miss payrolls that impact innocent people then their reign as a casino company will be over, sooner rather than later....We will see