Archive for May, 2017

A Not So Grand Bargain

The Illinois legislature is attempting to devise a compromise budget bargain that will satisfying both political parties and the governor.  The state is in a two and half year budget crisis that started when Governor Bruce Rauner vetoed the first budget of his term in office in 2015. In fact, no budget has been approved during his administration.  There are some observers who believe there is hope this year, but there are only a few days left in the legislative session.  Much has been written about the backroom, closed door negotiations between the state’s Democrat and Republican lawmakers as they try to reach a compromise that satisfies both parties and addresses the issues important to the Republican governor.  He has said he will veto anything that fails to meet his criteria.  The compromise is being called “The Grand Bargain” and as one might expect, it includes some grand plans for new casinos in Illinois.

“There is a grand bargain being negotiated. I believe new revenues through the casino are part of that grand bargain, and I’ve said I’m open to whatever package can move the needle to a balanced budget, and I’ve said I’m open to local control. So the answer is, if that came as part of a package, I could be supportive of that,” Governor Bruce Rauner said.

Calling the bargain “grand” is rather grandiose as the term connotes some truly Grand things such as the Grand Bazaar, Grand Canal, Grand Place and numerous Grand Hotels.  The Turks started building the Grand Bazaar six hundred years ago; the Grand Canal is as old as Venice. The Grand Place in Brussels began as a market in the 12th century and the hotels for the most part were creations of 18th and 19th century culture.  It is difficult for me to put a political bargain in Illinois in that category.  However, I suppose for those waiting for the state to pay up it would at least be a grand bargain if they get their money.  Illinois currently has $14 billion in unpaid debts because it is operating without a budget.

For the gaming industry, the important elements in the compromise include as many as six casinos, one of which would be in Chicago with another possible in Springfield.  A new and lower casino revenue tax is being suggested which might help the existing industry.  But if Illinois ends up with six additional casinos, a tax break is not going to make up for the revenue lost to those new casinos.  I see no upside to the expansion for the state’s casinos; in the aggregate the state would probably have more total revenue from casinos.  However, the grand bargain’s potential for success does not hinge on the casinos; it is dependent on meeting Governor Rauner’s criteria.  The Republican governor is a first term politician and a businessman.  Bruce Rauner ran on a turnaround platform promising that for any budget to receive his approval it must freeze income and property taxes, change collective bargaining and prevailing wage laws, increase sales tax to areas currently not taxed, consolidate local government bodies and impose term limits.  Thus far it has been a contentious and bitter battle for ideological control between the governor and the lawmakers.

“The governor may have underestimated just how strong the Democrats’ resolve was not to turn their backs on their traditional allies, as well as the Democratic leaders may not have appreciated how strongly the governor felt about trying to impose some of those turnaround agenda items in exchange for a tax increase,” Jak Tichenor, interim director at the Paul Simon Public Policy Institute at Southern Illinois University at Carbondale said. Decatur Herald & Review, 5-21-17

The governor has indicated he is prepared to finish his term in office without a budget.  He is willing to make the issue the centerpiece of his campaign for re-election and in the process blame career politicians, insiders and unions for the deadlock.  Rauner and one other man provided nearly all of the funding for his last campaign and have already put up a reported $100 million for his re-election efforts.  The ability to self-fund the campaign makes him far more independent than most candidates.  The budget has become a very high stakes game that some think is more like Russian roulette than poker.  I can see nothing grand in the making and in particular I can see no grand outcome for the existing industry in Illinois.  The Grand Bazaar has lasted for six hundred years because it has something for everyone.  The Grand Bargain has little of value for anyone and is not likely to survive even one legislative session.



Up, Up and Away – Maybe

The revenue crisis in Macau seems to have ended.  Gaming revenues have been rising for nine months after plunging for twenty-six months.  Until May 2014, casino revenues in Macau had increased month over month for ten years, peaking at $45 billion.  Up to that point there seemed to be no limit on gaming’s growth in Macau.  And then seemingly out of the blue, China decided to rid itself of corrupt officials.  Instantly, casino revenue started to fall as the high-rolling gamblers from Mainland China disappeared.  In retrospect, it seems Chinese government and business officials had been taking illegally gained money from the mainland to gamble in Macau.  To make matters worse, the Chinese economy which had been growing nearly as dramatically as Macau’s gaming economy stalled.  The downward spiral in Macau continued until August 2016 and then as abruptly as the trend began, it stopped and started to reverse directions.

Revenue has risen every month since last August.  At first, no one was willing to say the downward trend had stopped.  However, with each passing month casino operators, professional analysts and government officials have gained confidence in the upward trend. Nobody has been more confident than Lawrence Ho.  He thinks gaming is coming back, all the way back to 2013 levels. Recently Ho said, “Definitely within the next five years, it will grow back to a $45 billion gaming market.  And that’s just the gaming alone, because the non-gaming part is significant.” Ho is the chairman of Melco Resorts, a former partner of James Packer and the son of Stanley Ho, the grandfather of casino gambling; he also has two sisters with senior management positions in Macau.  Ho is Chinese and grew up in Macau and in gaming; he was there when the Macau reverted to Chinese control and he was one of the first recipients of the new licenses in 2003. All of that makes him an expert on gambling in Macau, so it would be foolish to dismiss his opinion offhand.

However, not every experienced observer and insider sees the same rosy future as Ho.  Pansy Ho, a sister, has some grave concerns about an industry built increasingly around non-gaming tourism.  Besides President Xi of China’s policy to eliminate corrupt officials, his government has been adamant that Macau must move past gambling and become an international tourist destination.  To meet that mandate all of the casinos currently under construction and those finished in the last three years have spent billions of dollars each on creating full resorts with hotels, convention facilities, a wide range of restaurants, entertainment and special tourist attractions.  Pansy says making those amenities pay for themselves is not easy.  One of the companies with which she is associated, reported significant losses in its hospitality division.  Ms. Ho thinks the city will to need to find “its own methodology” in diversification because the current one is not working.

The worst part of the campaign against corruption is probably over.   However, there are some dangling issues that connect the current situation to the crackdown and suggest it is not over yet.  In April, a former mainland provisional governor named Chen was removed from office.  The prosecutor in the case used language that suggests there is an unstated political agenda involved in the process.  The prosecutor said “Chen was politically climbing to power, economically insatiable and morally bankrupt. Even after the 18th CPC National Congress, he still showed no sign of restraint and [his wrongdoings] were of a grave nature.”  It is the kind of demonizing language that characterized the purges of Cultural Revolution.

Another indicator that all is not well beneath the surface can be found in the activities of the Commission against Corruption.  The commission has become very visible; in every meeting of officials in Macau a commission representative is present; including meetings with Chinese officials, international tourism gatherings and local cultural functions. There is a press announcement, at least weekly, concerning a new or an ongoing investigation into wrongdoings. I do not know what that means, except it seems like an implied threat.  Reading between the lines is a highly specialized skill in China.

Zhang Dejiang, the Chinese official responsible for oversight of Macau and Hong Kong, was in Macau in  early May.  Zhang stayed three days and made a number of appearances, making a speech each time.  He had one very constant theme saying over and over that government officials and lawmakers needed to commit to the “One Government, Two Systems” policy.  He suggested a loyalty pledge is in order and reiterated that all concerned should become more familiar with the meaning of the policy.  Attempting to read between the lines, it sounds more like a threat, a promise to punish misbehavior rather than a pat on the head for a job well done.  Regardless of the true meaning of his words, he had an instant impact on gaming.  Analysts gave Zhang credit for a decline in revenues during his visit.

In the midst of the turmoil of the last three years, several new properties have opened. The market may be expanding, but all the casinos within the market are not necessarily sharing in the good times.  In fact, recently I came upon an interesting story in the Macau Daily Times.  It suggests that for some properties these are not good times.   According to the article, City of Dreams, one of the latest multi-billion-dollar resorts to open, is having weekly drawings for free airline tickets.  Three times a week at 8 pm gamblers get a chance to win a “Travel without Limits” ticket, allowing them to travel as much as they want for a full year.  Now, I don’t know about your experience, but in mine, drawings like that take place when business is slow.  Oh, and I forgot to mention, City of Dreams is owned by Lawrence Ho’s company.   Regardless of City of Dreams and drawings, gaming revenues in Macau are moving up significantly.  The way the revenue trend in Macau reversed is very rare.  But everything about Macau is rare and different.  The gaming industry has never seen anything quite like it and today it may be up, up and away and tomorrow it could be down, down and down.

A City and an Industry in Transition

The casino industry has changed dramatically since the 1980’s when I worked at the Comstock Hotel and Casino.  In those days, Reno was a vibrant, growing and expanding casino market; it was the number three gaming market in the country after Las Vegas and Atlantic City.  The picture is very different today; most of the casinos from my day have closed up shop and the buildings have been repurposed.  The surviving casinos have one thing in common; they are now part of national corporations.  Those still open and operating are no longer tied exclusively to Reno or as Gary Carano said, “We don’t have all of our eggs in one basket.”  Carano is the CEO of Eldorado Resorts, which as of May 1, 2017, owns 19 casinos in 10 states. That corporation is a far cry from the Eldorado Casino that opened in Reno in 1973 with a few hundred slot machines and 282 rooms.

On May Day, Eldorado Resorts completed its purchase of Isle of Capri.  That purchase was the most recent in a string of mergers and acquisitions over the last few years including the Silver Legacy and Circus Circus in Reno in 2015, a merger with MTR Gaming in 2014 and an earlier purchase of Hollywood Casino in Shreveport, Louisiana.  In the process, Eldorado Resorts has risen to number six on the list of gaming corporations as ranked by the number of casinos operated.

Thirty-five years ago, the Carano brothers and I were competitors in the casino core of Reno.  There were over 20 casinos within the downtown area competing for the 5 million tourists who visited Reno annually in the 1980’s.  Each of us tried to differentiate our casino from the others with promotions, food specials and gaming tournaments.  The Eldorado concentrated on quality and targeted a more sophisticated table game and restaurant customer.  Except for Harrah’s, the other casinos targeted slot players.  The Eldorado introduced higher quality restaurants, higher limit games, upgraded hotel rooms and renewed with a more elegant décor.  Only Harrah’s competed directly with the Eldorado by offering comparable products.  Competing for those customers requires constant reinvestment. If everything is not well-maintained with the most up-to-date rooms, restaurants, slot machines and entertainment, customers go elsewhere. Long ago, Harrah’s threw in the towel as Reno was no longer worth the investment.  As to those other casinos, the slot players found a slot machine closer to home in an Indian casino.

The number of people visiting Reno has been decreasing yearly since the advent of Indian gaming.  As the number of Indian casinos in Washington, Oregon and California increased, the number of tourists coming to Reno dropped.  In 2017, that number is closer to 2 million than at the peak in the late 1980’s when nearly 6 million visitors came to town.  The result is easy to see; today there are only seven casinos where once there were twenty.  It has been clear for a long time, that if you have only one casino in downtown Reno, you probably will not remain in business.  There are exceptions in the greater metro area.  The casinos catering to local business in their immediate vicinity, such as the Atlantis, Peppermill and the Gold Dust West have done well over the years.  But Reno’s economy has also evolved.  It has moved being driven by gaming to an economy is built around technology.

The Reno casino industry has changed a great deal in the last thirty years, but the overall gaming industry has changed even more. The Eldorado succeeded by expanding into other markets.  It is the only successful strategy thus far for a downtown Reno casino; actually it is the only truly successful strategy in the country.   In today’s competitive environment, a casino company with an operation in only one jurisdiction faces a very uncertain future for several reasons.  A single event such as a flood, hurricane or regional recession can spell its doom.  Half of the casinos that have disappeared in Reno in the last 20 years did so as a result of the disastrous flood of 1997.  It was the proverbial straw that broke the casino’s back.

Additionally, there is an even larger threat, the gaming expansion in neighboring states.  An increase in casinos in adjacent states always reduces the base of regular customers.  That is what casinos in Pennsylvania did to Atlantic City and Indian casinos did to Reno.  The problem is not unique to Atlantic City or Reno; in 2017, no single jurisdiction can withstand significant expansion on its borders. The casino gaming industry is transitioning from a local into a national industry.  It is now dominated by a handful of major corporations.  Those corporations are the only ones able to survive the ups and downs of individual jurisdictions. They have ready access to financing and thus the ability to maintain highly competitive individual properties and to compete for licenses in new jurisdictions.

The Eldorado survived the decline of Reno and joined the ranks of the big guys.  It survived because it expanded, but also because in Reno it maintained its commitment to quality.  The Eldorado continued to reinvest here while the rest of us failed to do so.  Maybe it was because we did not have enough cash flow or maybe it was because our vision was too narrow.  Today, the Comstock has no casino, no restaurants and no retail, just condominiums. But, if you want to invest in Reno, I think there are even a few units available or you might buy some stock in Eldorado Resorts.

The Reno-based company closed on its acquisition of Isle of Capri Casinos, adding 12 more properties to its portfolio and creating a larger regional gaming business worth $1.7 billion. Eldorado acquired Isle of Capri for $23.00 in cash per share or 1.638 shares of Eldorado common stock. Eldorado first announced its plans to acquire the company last year. The acquisition adds to a growing portfolio for Eldorado Resorts that includes properties in Nevada, Louisiana, Ohio, Pennsylvania and West Virginia. In addition to its Reno Tri-Properties, which include the Eldorado, Silver Legacy and Circus Circus, the company also owns Eldorado Shreveport, Scioto Downs, Mountaineer and Presque Isle Downs.  The acquisition of Isle of Capri further expands the list to 19 total properties in 10 states, which now also include Colorado, Missouri, Mississippi and Florida. Jason Hidalgo, Reno Gazette-Journal, 5-2-17


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May 2017
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