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Economy putting pinch on gambling industry
High cost of borrowing has executives shying away from splashy new projects
AP Photo
Makers of such games as these slots in Las Vegas are expected to focus on persuading casinos to replace machines.
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Published: November 20, 2008
LAS VEGAS
Executives at top casino companies said yesterday that the gambling business won't be the same for years to come as game-makers and casino owners shift focus to properties that already exist from casinos still being planned.
"One of the challenges that has plagued the casino industry for a long time is that we spend money like drunken sailors," said Gary Loveman, the chairman and chief executive of Harrah's Entertainment Inc. "I think the industry is going to have to get accustomed to the notion that not every project is a good project -- and $1 billion is a lot of money, after all."
Loveman told other casino operators at an industry conference that Harrah's, its competitors and other businesses may have to change how they work -- particularly how they finance development -- for the rest of his professional life.
"The arms race that has characterized the business over the last several years might have to de-escalate," Loveman said. "There will be a significant sea change in the way in which the balance sheets of these businesses are structured."
Casino companies -- which are seeing revenue decline across the board because consumers are spending less on gambling and the other services that casinos offer -- generally rely on developing new projects for their growth.
But they can't borrow money cheaply enough anymore to justify new projects.
Privately held Harrah's, the world's largest casino company, is actively working to restructure its debt. Harrah's operates as a casino in Cherokee, N.C. It's the only casino in North Carolina.
On Monday, the company and its partners withdrew their proposal to manage a $535 million state-owned casino in Kansas, citing "unprecedented disruption in world financial markets."
MGM Mirage Inc., in the midst of building the largest private development in U.S. history, has struggled all fall to secure the last pieces of financing for its $9.2 billion CityCenter Project on the Las Vegas Strip.
With room rates down, airlines cutting flights to Las Vegas and the reduced number of visitors holding on tighter to their wallets, industry analysts question whether the demand remains for CityCenter and other ambitious projects under way or on the drawing boards.
Several projects here already have been delayed, including Boyd Gaming Corp.'s $4.8 billion Echelon, a second high rise for Donald Trump's Trump International Hotel & Tower, and a condominium tower for Las Vegas Sands Corp. between its Venetian and Palazzo casinos.
"I don't see any new development coming to this market for the next five to seven years," said Dan D'Arrigo, the chief financial officer for MGM Mirage.
For such manufacturers as International Game Technology, that means switching gears from selling new casinos their machines, to convincing existing casinos that they need replacement machines, said its chief executive, T.J. Matthews.
Matthews said that his job now is to develop machines that entertain customers more effectively and more efficiently.
The company, the world's largest maker of slot machines and casino-management systems, offered about 500 employees, roughly 8 percent of its global work force, either early retirement or severance packages.
The cuts will cost up to $21 million, the company said yesterday.
Loveman praised Matthews but said that new machines will be a tough sell for casinos worried about polishing their balance sheets.
"Until those imbalances are resolved ... it's going to get very hard to get excited about the next new buffet, the next new food-and-beverage experience, the next new nightclub experience, the next new gaming experience," Loveman said.
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