St. Louis: Penn in, Harrah’s out

By David McKee ~ May 8th, 2012 @ 11:54 am

A ways back, the news broke that Caesars Entertainment — being well and truly on its uppers — was trying to shop as many as 10 Southern and Midwest casinos. The goal was to raise at least $500 million to pay for CEO Gary Loveman‘s promiscuous development commitments along the Eastern Seaboard. Well, if a half-billion was all that was needed, Loveman made his goal and them some, offloading Harrah’s Maryland Heights Casino to Penn National Gaming for $610 million.

It’s a costly deal for both sides. Penn paid almost 8X cash flow, a premium price on the face of it (but … see below), and will inherit deferred-maintenance issues. In true Loveman fashion, Harrah’s Maryland Heights “has seen relatively little investment in recent years, even as new rivals around the region have opened up and old ones have expanded,” according to the St. Louis Post-Dispatch. It also creates the problem for Penn of what to do with Argosy Alton Belle, its low-grossing riverboat (roughly $6 million a month, compared to Harrah’s $22.5 million) just 25 miles away in Illinois. Penn will consolidate management of the two, thereby realizing some near-term savings, and it could run Alton Belle as a “convenience gambling” grind joint. However, were I an employee there, I’d start updating my resumé: Penn is overexposed in Illinois, as we discussed yesterday, and Alton Belle‘s fortunes have declined severely from its glory days as an Argosy Gaming flagship. I’d expect the “for sale” sign to go up soon.

The deal represents a big trade-off for Caesars. It forgoes $270 million/year in revenue over the next few years, with the hope that projects in Massachusetts, Maryland and maybe even Florida have come to fruition in a big way by the time those whopping debt maturities come due in 2015 — although casino RFPs in Loveman’s home state won’t go out until next year. Penn’s $610 million should be sufficient to bankroll Loveman’s commitments to Baltimore and to Suffolk Downs (above), perhaps more. (There’s always Toronto, but I don’t rate Caesars chances there highly and Loveman’s interest looks suspiciously like a fallback from besieged Caesars Windsor.) Dr. David G. Schwartz tells the Las Vegas Review-Journal that the Harrah’s lucre might go to pay down the company’s gargantuan debt but I suspect he’s pulling our leg. Paying debt is the last thing Captain Deadbeat, I mean Loveman would do with that money and even then not unless bankers put a gun to his head.

Making way for the megaresort that never was: Harrah’s Margaritaville.

The company also just took a $167.5 million first-quarter bath on its failed Margaritaville megaresort attempt in Biloxi, which I interpret as positioning Grand Biloxi Casino Hotel & Spa for a sale. Like Penn, Caesars is about to open the cash spigot in Ohio. But, unlike Penn, Caesars’ financial debility means it’ll be riding sidecar to Dan Gilbert, settling for a fifth of the action (plus management fees), while Penn owns the entire revenue stream at its casinos-to-be.

Loveman’s stated goal is trading “occasional divestitures” for “expanding our distribution network into growth markets that have the potential for high returns.” However, what he probably had in mind was unloading dogs like serial underperformer Harrah’s Council Bluffs (left) or peddling a surplus casino here (Tunica), maybe there (Atlantic City). Instead, he’s forfeiting a major market — St. Louis — so he can afford to enter the low-return Baltimore one instead and impress the home-town crowd in Boston. Lucky for him, Steve Wynn is facing odds that are damned near insurmountable … despite being one of the few casino applicants who fits the profile Massachusetts Gaming Commission members say they’re seeking. Contrary to my prediction, Loveman won’t be settling for the Class II slot parlor permitted under Massachusetts law. In any event, Plainridge Racecourse will beat Caesars to the punch. The slot parlor will be bid out first, so Loveman’s staking everything on getting Class III games at Suffolk Downs.

The Post-Dispatch headline said it well: “second-busiest casino to change hands.” That’s the price of Caesars’ empire-building. While this acquisition will get pricier once the capex-maintenance bills start mounting (Joseph Greff projects $20 million in new-slot/signage costs right off the bat), the upside for Penn looks tremendous. Besides, the company expects to achieve some tax savings that will reduce to price tag to a bargain-rate 6.75X cash flow. There could be late-2012/2013 player defections to nearby St. Louis rivals Ameristar Casinos and Pinnacle Entertainment, depending on how much punter data Caesars is willing to share with Penn on its way out the door … precious little, I’d expect.

Another attempted asset sale that continues to hang fire is that of The Rio, Caesars’ red-headed stepchild. Perhaps the vicious degree of neglect Loveman and the now-departed Marilyn Winn visited upon it represents Oedipal payback toward predecessor Phil Satre. Who knows? From what I’ve been hearing, Caesars has needed to come down 20% off its Rio asking price in order to move it, and won’t. But, judging by how “ghetto” the exterior of The Rio is looking, I’d say the discount will need to be steeper still. About the only way to get The Rio for a fair price would be for you to buy some Caesars debt at a distressed rate and trade it for what used to be the most beautiful building on the Strip … although Loveman’s managed to fuck that up by good.

Penn on the move. After a lot of sniffing around in western Massachusetts, Penn has momentarily settled upon an infrastructure-challenged site in Westfield. Access is gonna be a bitch, which is is what put MGM Resorts International off its feed in Brimfield, and Hard Rock International has already bailed on Westfield. Penn is certainly capable of meeting Mayor Daniel M. Knapik‘s criteria. His call for an “entertainment-based” facility harmonizes nicely with Penn’s Hollywood brand. With MGM poking around in the sticks (and newly fixated upon Toronto), this still looks like an Ameristar vs. Penn battle.

By hook or by crook, there’s going to be a casino for the Mashpee Wampanoag tribe, at least as long as there’s a tribal-friendly administration in Washington, D.C. (which could change next January). Massachusets’ one-casino set aside for the tribe is being challenged by the courts and state regulators don’t have to approve the Wampanoag’s application — although the fix is pretty much in for them. And if, for some reason, the state doesn’t like what it sees from the tribe, the latter’s still got at least seven months to try and make an end-run by way of the Obama administration and the aptly named “Carcieri fix.”

And, in case all that fails, a rival Wampanoag band is pitching its own casino project. The Aquinnah Tribe, however, is in a sticky legal wicket largely of its own making and Gov. Deval Patrick (D) is disinclined to help. Also, financier of choice KMD Consulting Services is a relatively lightweight outfit, its specialty seeming to be developing casinos in tertiary markets for tribes who have little or no capital of their own. However, the Aquinnah have a few aces up their sleeves, including land in trust on a prime spot (Martha’s Vineyard) and possible recourse to the Interior Department if Patrick continues to give them the cold shoulder.

The Mashpee Wampanoags, meanwhile, are proceeding with all deliberate speed. The $500 million, three-hotel development would be built in East Taunton, whether residents there want it or not. (A June referendum is nonbinding.) However, IGRA compliance “could take years” and the purse strings are controlled by Genting Berhad CEO PK Lim. Malaysia‘s been a favored source of finance for tribal casinos, but usually at punitive interest rates, so it would likely be a very long time before the Mashpee see any substantial benefit from their gift-wrapped casino.

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