A Pennsylvania whirlwind that hit AC, but now it may be turning back and going home

After six years, everyone gets it – Wall Street, investors, state officials, regulators, casino operators, casino employees – everyone considered: Atlantic City is in trouble.  The demise of Atlantic City was a topic of discussion at the eight annual Pennsylvania Gaming Congress in Philadelphia.  And there is no more perfect place to discuss the downfall of Atlantic City than in the epicenter of the Boardwalk’s demise, Pennsylvania.   Just six years ago, 50-60 percent of the gamblers going to Atlantic City came from Pennsylvania; today they are staying home and generating nearly 4 billion dollars in gaming revenue for the Keystone state.  Other states have contributed to the decline in gaming revenues in Atlantic City, but Pennsylvania gets the lion’s share of the credit.

Ever the best of the Monday morning quarterbacks, a panel of Wall Street analysts cut through the clutter straight to the heart of the matter – there are too many casinos in Atlantic City in 2013.  There are too many casinos and too much competition for all of the casinos to make a profit.  Atlantic City’s gaming revenues peaked in 2006 at $5 billion, since then revenues have fallen 40 percent.  None of the panelists or much of anyone else believes Atlantic City will ever recover completely; “We’ll never get back to the $5 billion range in Atlantic City. It will never happen,” said Wall Street panelist John Kempf, a casino analyst with RBC Capital Markets.

According to the panelists, to the problem there but one solution; “We would like to see a couple of them shut down,” Christopher Jones, managing director of the Telsey Group of New York, said bluntly.  Mr. Jones even knows which ones should be the first to exit – the Atlantic Club and Resorts.  Mr. Jones is not the first person that has said some of the casinos are going to have to go away for the remaining ones to survive and become profitable, just the most recent one making the statement.  Mr. Jones used a common technique to chose the casinos that should close;  he looked at monthly gaming revenue list and picked those on the bottom.  It is the usual way – it is the way the industry has traditionally chosen slot machines to be replaced and it is the normal way a capital market works; the weak are too weak to survive and therefore die, trampled by those above them.  One of the analysts did not want to wait for nature to run its course; Adam Steinberg suggested the state take control and bulldoze the losers.

Adam Steinberg, a veteran casino analyst and president of A.M. Steinberg Advisors, joined Jones in arguing that it would be better for Atlantic City’s overall financial health if some of the unprofitable casinos folded. He did not name names.  Afterward, Steinberg said in an interview that New Jersey should buy the weakest casinos and demolish them to create green space that would enhance the city’s appearance. With fewer competitors around, the stronger, surviving casinos would have greater incentive to invest in their properties to make Atlantic City even more attractive to visitors, Steinberg added. Donald Wittkowski, Press of Atlantic City, 4-17-13

However, as you might suspect the owners and managers of the casinos at the bottom have a different view.  Atlantic Club is being sold and its new owners are not likely to want it torn down before they get a chance to work their magic.  Resorts is also going through a transition as Mohegan Sun is now managing the property.  Resorts CEO Mitchell Etess thinks Resorts is coming along quite nicely, thank you very much.  He paraphrased an old Bob Dylan song in his response to the panel’s comments – “there is something happening here, but you don’t know what it is, do you Mr. Jones?”; actually he said: “I can only imagine that the panelist has no idea of what is going on at Resorts,” Etess said of Jones.

Mitchell Etess, chief executive officer of Mohegan Sun, the Connecticut-based operator of Resorts, strongly denied that there is any chance that the casino will close. He said Resorts has secured its future by building a $35 million Margaritaville-themed restaurant, bar and casino expansion. The project will add 600 new jobs when it opens this summer. Donald Wittkowski, Press of Atlantic City, 4-17-13

Finding agreement on the subject is a challenge, there were even those in Philadelphia that think Atlantic City will be fine in the long run.  They believe that mergers and sales will create bigger, healthier and stronger casinos.  Casinos able to fight the competitive battles that are far from over as more casinos enter the northeastern market.  Atlantic City was the hot topic, but not the only one;   another panel was focused on the casinos in Pennsylvania.  The panelists thought the casinos in Pennsylvania are going to have to invest more money in the future to be competitive.  The panelists see that Pennsylvania is facing competition too, and to continue to prosper they believe the casinos are going to have to evolve into resorts.  That idea prompted someone to point out that a 45 percent tax rate is not conducive to major reinvestment; Pennsylvania’s enabling legislation envisioned tax revenues not a healthy, competitive casino industry – that was simply a given in the minds of the governor and legislature in 2005.  Pennsylvania collects much more in gaming tax revenue than Nevada.  Nevada generates many times more in capital investment than Pennsylvania; it is all in the vision as expressed in the enabling legislation and the taxation policy.

The way to compete in the casino industry doesn’t have much to do with the games themselves, but instead it’s the other attractions a venue offers.  Whether it’s concerts, shopping, salons or golf, casinos need other amenities in addition to slot machines and table games if Pennsylvania wants to remain the second biggest gaming state in the nation. That was a often-repeated message Tuesday at the eighth annual Pennsylvania Gaming Congress held in Center City Philadelphia…One problem Geller and Levinson noted that Pennsylvania might have with continued amenity investments is the high slot machine tax rate of 45 percent. Geller said casino operators might put more money into casinos in states with lower tax rates because the return on investment could be higher. “Forty-five percent is one of the highest in the nation,” Geller said. “That has to impact the amount people are willing to invest in the state.” Andrew M. Seder, Sunday Dispatch, 4-17-13

And Pennsylvania will one day have to face the inequities its taxation policy creates for its casinos competing with casinos in neighboring states.  Even if the casinos in Atlantic City are on their knees, they are not out and they have not stopped fighting back.  Quite the opposite, and if the Wall Street guys get their wish the casinos in Atlantic City will be much stronger and better competitors.  The recent casino sales in Atlantic City have injected some new capital and new energy into the market – and reduced the debt.  The casinos in Pennsylvania will not be able to continue as they have in the past.  Like Atlantic City, in fact like every jurisdiction, the casinos in Pennsylvania are going to have to compete, not just against each other, but against casinos in other states.  The tax rate is going to be a severe handicap, especially against an Atlantic City with few casinos, less debt, less regulation and a new determination.  Pennsylvania created a whirlwind that tore through the Boardwalk city, but it is turning around and about to start back.  There are another whirlwinds being generated by Ohio and New York; those are strong winds headed for the Keystone state.



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