Monday, July 7, 2008

Gaming And The Economy

By Ken Davison
Feather News


Penn National Gaming, the firm that sold the Pocono Downs racetrack to the Mohegan Tribe, announced on Thursday that two companies were abandoning their roughly $6 billion private equity takeover plans for the gaming company.

Fortress Investment Group and Centerbridge Partners agreed to buy Penn National last year for $67 per share and, since then, Penn has been seeking the required approvals from regulators in each state where the company is doing business.

Remember when tribal members questioned the purchase of Pocono Downs? A clause in that purchase agreement said that the Tribe could terminate the purchase of the Pennsylvania racetrack under certain conditions and be paid back by Penn National an appraised value of the property.

Well, guess what Fortress and Centerbridge and company had to pay Penn National for terminating their purchase agreement? The proposed buyers and their affiliated banks must pay Penn National $225 million in cash and they will also buy $1.25 billion in redeemable preferred equity, which some describe as essentially an interest-free loan.

Penn National Gaming is the owner of 19 racetracks and casinos. Its stock price has fallen by about 50% since the beginning of the year and closed last Thursday at its lowest point in two years.

Many gaming stocks have fallen sharply amid a sluggish economic climate, rising fuel prices and a retreating stock market. As of last Wednesday, the Dow Jones Industrial Average had fallen 20 percent since its all-time high last October. The 20 percent threshold is considered a classic sign of a bear market.

The peak of the frenzy over gaming stocks, perhaps best illustrated by the $28 billion buyout of Harrahs in January, has ended. Harrahs is the world's largest casino company.

Las Vegas Sands Corp. stock reached a two-year low during trading last week and one analyst, Jake Fuller of Thomas Weisel Partners, said last week that the Sands’ Venetian on the Las Vegas Strip is reducing its hotel room rates by 25% for summer visits. Wynn Resorts is reducing room rates by 10-12% and MGM Mirage’s Bellagio by 20%, he said.

In a May conference call, Mohegan Tribal Gaming Authority’s Chief Executive Officer Mitchell Etess told analyst Jane Pereira of Lehman Brothers that there were no plans to discount hotel rooms at Mohegan Sun.

Shares in Isle of Capri casinos, a gaming company heavily-weighted with properties in the South and Midwest, hit a nine-year low. Shares of Wynn Resorts traded at their lowest point since November 2006 and MGM Mirage hit a three-year low during intra-day trading in recent days. MGM is down 60% just since October. Keybanc Capital Markets analyst Dennis I. Forst downgraded MGM at the end of June, citing a sluggish economy, high fuel costs, competition from a Wynn hotel opening next year and reduced airline capacity into Las Vegas.

The Northeast:

Two recent expansions opened in the Northeast within the last two weeks: MGM Mirage and Boyd Gaming opened a $400 million, 900-room hotel (called the Water Club) at their jointly-owned Borgata property in Atlantic City and Penn National Gaming opened a $132 million 1,000-machine slot parlor and 154-room hotel expansion in Bangor, Maine.

The Mohegan Tribe’s Pocono Downs’ $208 million expansion is set to open July 17, pending the approval of state regulators. The property will roughly double the number of slot machines currently in use to about 2,500 machines.

The credit ratings of two competitors of the Tribe were recently downgraded. The company that operates the Twin River greyhound track-slot parlor in Rhode Island was downgraded in March and the Mount Airy racetrack-slot parlor in the Pocono Mountains in Pennsylvania was downgraded in June. These actions follow credit and credit outlook downgrades for both MTGA and the Mashantucket Pequot Tribal Nation in recent months.

Twin River said it would consider filing for bankruptcy or other debt restructuring moves if the state does not lower their 62% take of VLT slot machine revenues. The company offered the state of Rhode Island $560 million in exchange for the state slicing its 62 percent effective tax rate on its slot revenue to 25 percent. Rhode Island is not likely to agree to such terms.

The Tribe’s Pocono Downs racetrack-slot parlor in Pennsylvania is currently paying a similar tax rate as Twin River. Pocono Downs pays the state of Pennsylvania just over 60 percent in taxes and fees from its slot machines but that rate could drop a few percentage points based upon the increased revenues.

Even the credit rating firms took a hit last week. A report issued under the auspices of the Bank for International Settlements, which acts as a central bank for the world’s monetary authorities, said the major ratings agencies should enhance their grading process of asset-backed securities and other bonds and make rating documentation more accessible to investors.

The report is part of an attempt by governments and regulators to give greater scrutiny to the role and practices of credit-rating companies in securitizations and better oversight of the mortgage finance system. The report said that Moody’s, S&P and Fitch Ratings “underestimated the severity of the worst U.S. housing slump since the Great Depression.”