Credit crunch affects plans for expansion

August 07, 2007 3:48 AM


With tighter credit conditions, the odds of more large-scale casino buyouts don’t look good, gaming analysts predict.

Instead, investors should focus on operators’ business fundamentals, especially location.

Toward that end, Las Vegas remains strong while Atlantic City struggles with a partial smoking ban and competition from new casinos in eastern Pennsylvania. The outlook for other areas, from Detroit to the Gulf Coast, is mixed, analysts say.

Lehman Brothers analyst Felicia Hendrix recently upgraded MGM Mirage to "overweight." Now that Harrah’s Entertainment is awaiting a $90-per-share buyout by private-equity firms, MGM Mirage and Las Vegas Sands, which reported earnings after the bell last week, are among the few remaining Las Vegas plays, she notes.

Casino stocks, like gaming itself, can be risky, Hendrix warns. Shares could suffer losses amid concerns about consumer spending. But she thinks upgraded accommodations could lure more gamblers. Besides her Vegas plays, Hendrix likes Penn National Gaming and Pinnacle Entertainment.

CIBC World Markets analyst David Katz agrees that tough credit markets hamper prospects for buyouts. But MGM Mirage, which he rates "sector outperformer," could attract buyers due to its vast real-estate holdings.

MGM Mirage executives agree. Their plan to build a new resort on 26 acres across from the Sahara will be financed by seed money provided by partner Kerzner International, as well as banks that will loan on their real estate holdings.

"The folks we’re talking to are large non-gaming strategic partners and other investors who aren’t dependent upon the daily fluctuations in the credit markets said Jim Murren, MGM Mirage president and chief financial officer.

Smaller operators may not have the same options available.

Silverton, for instance, announced it has put on hold a $500 million renovation project because of a slumping junk bond market. They hope for a better business climate in which to sell bonds to finance the building of a new hotel tower and other amenities.