Top 2004 stories segue into 2005

Dec 28, 2004 6:42 AM

Tennyson once wrote something about ringing out the old and ringing in the new, which is the traditional thing to do on New Year’s.

For the gaming industry, the upcoming year promises to extend many of the stories that began in 2004, with a few new wrinkles along the way.

The biggest story this past year was the continued consolidation of the gaming industry. Boyd completed its merger with Coast, while MGM Mirage and Harrah’s undertook consolidation with Mandalay and Caesars, respectively.

Though more huge mergers aren’t likely, there should be continued consolidation among smaller companies such as Pinnacle, Penn National or Ameristar.

In 2004, poker continued its meteoric rise in popularity as legions of new players flocked to card rooms or logged onto poker web sites.

Expect the rabid fascination with "going all-in" to continue in 2005, although many believe the passion for poker might be reaching a plateau.

A story that began to unfold in 2004 is the urbanization of Las Vegas through a number of high-rise condo projects. Insiders say we’ve only seen the tip of the condo iceberg and predict the "condo casino" could become the economic model for gaming development in 2005 and beyond.

Slot makers could be looking at a booming 2005, if certain political and jurisdictional developments manifest. First, the demand for Class II slot machines could skyrocket if tribal casinos elect to defy the California governor.

And secondly, the slot industry is champing at the bit to run with its downloadable or server-based slot systems. These cutting edge systems load slot games from a central computer library into generic slot machines on the casino floor.

Although there are venues in Europe that utilize such systems and manufacturers already have the product on the assembly line, U.S. venues have been reluctant to approve the technology. Maybe 2005 is the year.

Consolidation

The gaming industry was rocked by the announcement last summer of MGM Mirage’s $7.3 billion purchase of Mandalay Resorts. Not to be outdone, Harrah’s Entertainment a few weeks later announced a $9.5 billion purchase of Caesars Entertainment.

Both deals are undergoing scrutiny by various gaming jurisdictions and the Federal Trade Commission. If nothing snags the processes, the deals will close in the first quarter of 2005.

In the meantime, the mergers seem to have gained acceptance, at least at the shareholder level. Since the deal was announced, MGM Mirage shares have risen by 55.93 percent, outperforming the S&P 500 index by 48 percent. And Harrah’s shares have risen 18 percent faster than the S&P index.

In the wake of the two mega-mergers, Penn National Gaming announced a purchase of Argosy Gaming that would make it the third largest operator behind Harrah’s and MGM.

But insiders believe Penn National isn’t through. Candidates that might be on its radar screen are Ameristar Casinos, Aztar, Pinnacle and, to a lesser extent, Isle of Capri. Based on its strong position in the Mississippi market, many are betting that Ameristar might be ripe for a merger.

Poker Power

Poker is no longer the "old man’s game" in the smoky corner of the casino. Fueled by cable TV and celebrity tournaments, the popularity of poker is at an all-time high.

That popularity is reflected in Las Vegas casinos scrambling to install (or re-install) or expand their poker parlors.

For instance, Bally’s just opened a new poker room, and Caesars Palace and MGM Grand both announced plans to re-open poker rooms in 2005.

In addition, the Golden Nugget opened a high stakes card room and the Mirage added seven tables to its existing 24 poker tables.

"It’s such a popular game right now," said Dennis Neilander, chairman of the Nevada Gaming Control Board. "It’s driving a lot of patrons into these properties."

That’s what casinos want, of course. Moreover, since they only "rake" a percentage of the pot as compensation for dealing the games, casinos are betting players find their way into more lucrative areas of the casino, such as the table games pit, slot areas, restaurants and bars.

”˜I’ll take Manhattan’

MGM Mirage announced last fall it plans to build a $3 billion CityCenter mixed-use project on the 66 acres between Bellagio and Monte Carlo. The "mini-Manhattan" will include a 4000-room hotel-casino, three 400-room boutique hotels, about 500,000 square feet of retail shops, dining, entertainment venues and a 1650-unit condominium hotel.

The announcement brought to light the idea that Las Vegas is becoming urbanized with high-rise residential development. Currently there are about 30 condo projects in various stages of development. Among them:

”¡ Steve Wynn plans commercial/residential development on land behind Wynn Las Vegas.

”¡ MGM is in a joint venture with Turnberry Associates to build up to 3,400 condo units on the site of the old Grand Adventures theme park.

”¡ Vegas Grand is building 880 condo units at Flamingo Road and Swenson Street.

”¡ Laurence Hallier and Andrew Sasson are building a series of high-rise condos on Industrial Road, between Harmon and Tropicana avenues.

”¡ Las Vegas Central plans two 46-story towers on Sierra Vista Ave. near the Convention Center.

”¡ The new owner of Alexis Park is converting some units to condos and has purchased the apartments west of the property with the intent to build high-rise condos.

What’s fueling the interest in high-rise condos and how do casinos fit in?

Experts say there’s a pent-up demand for high-density housing such as condos, especially as the Las Vegas area expands deeper into the desert and traffic becomes increasingly congested.

Developer Bruce Langson of Las Vegas Central estimates there could be a "20,000-unit deficit" of condos in Las Vegas.

Casino operators who build condominiums also have an incentive: building codes allow double the density of condos when they are on a casino site or adjacent to one. Also, the sales of condos can help defray the cost of subsequent development.

Moreover, condo developers can initially sell 30 percent of their units to companies such as The Formula in Ft. Lauderdale, Florida, which buys blocks of condos, with the stipulation that the developer guarantees price increases that will give them a 15 percent "spread."

"We simply want the 15 percent spread between what we pay and what the other 70 percent of owners pay," said Brian Neiman, founder of The Formula.

Beyond such creative financing, casino operators view high-rise condos as a viable economic alternative to hotel guest rooms.

"The days of building the Bellagios and the Wynns are over," said Jim Murren, MGM Mirage president and chief financial officer, in an interview with the New York Times. Murren added that the reason a casino operator would think condo instead of hotel is the profit margin.

Non-gaming revenue, Murren explains, has now eclipsed gaming revenue at MGM Mirage casinos. Moreover, the margin on gaming revenue isn’t nearly as great as it is on retail sales, entertainment and accommodations.

In addition, insiders say that purchasers of condominiums as a second or vacation home are likely to spend more time in Las Vegas than someone who visits for a weekend four or five times a year. When the condo owner isn’t in town, the unit can be rented and revenue split with the hotel.

Other mixed-use projects include the property behind and west of the Alexis Park, Donald Trump’s acreage behind the New Frontier, a 900-foot high Summit on the site of the old Holy Cow Brewery (Sahara Ave. and the Strip), Sky Las Vegas on the Strip between Circus Circus and Hilton Grand Vacations, and Paul Lowden’s development on the site of Wet ”˜n’ Wild water park.

Out of their Class

Two California tribes are currently embroiled in a dispute with the state over their Class II slot machines. The tribes have installed nearly 4,000 of the machines, bringing their total inventory of slots to about 4,000 apiece, double the legal maximum.

If the tribes prevail and courts rule that the Class II machines are covered under existing compacts with the state, then that would open the floodgates to 60 other tribal casinos to add the so-called "bingo slots." That would be a boon for manufacturers like IGT and Bally, which both have subsidiaries making Class II slots.

Downloadable games are definitely the future of casino slots. But regulators have so far failed to okay them because of the fear of hacking and security.

When they are approved, it will be the next huge wave in slot development.