Weekly Corporate Growth Report: M&A in the Casino Industry: Betting on Consolidation

Big casinos are gambling on industry consolidation. The last few months have seen several large deals in the sector. As a result of these deals, it is likely that a few giants will dominate the gambling industry. Smaller operations in the sec tor may be driven to consolidate as well in order to remain competitive. But the giants' rule is not yet certain - it is possible that antitrust regulators will require divestitures or other concessions as a result of the mega-deals currently happening in the industry.

Big money is changing hands in the gambling sector. Boyd Gaming Corporation officially completed a $1.3 billion buyout of Coast Casinos at the end of june. MGM Mirage announced a $4.8 billion bid for Mandalay Resort Group in the same month. Even more recently, Harrah's Entertainment Inc. topped them both with a $9.4 billion announced deal to acquire Caesars Entertainment Inc.

The merger of Harrah's with Caesars would create an international casino empire. In the United States alone, the operations of the combined company would extend from the Gulf Coast north to Atlantic City and across the Midwest to Las Vegas. The combined company would own 56 casinos and nearly 42,000 hotel rooms in 13 states and four other nations. Harrah's has stated that the deal will not sidetrack its current plans to expand into other markets.

The MGM Mirage acquisition of Mandalay would create another industry powerhouse. The combined company created by the deal would own and operate 28 casinos and resorts, including a dozen of the Las Vegas Strip's most recognized names. Before Harrah's announced its deal with Caesars, the MGM Mirage deal was expected to create the largest gambling resort company in the world. .

With large deals uniting the major players in the industry, smaller casino companies may be driven to consolidate in order to remain competitive. David Herman, head of the gaming, lodging, and leisure group at CIBC World Markets, claims the recent megadeals "put pressure on the next tier of midcap gaming companies to get into the dance." Casino operators in that tier include Ameristar Casinos Inc., Aztar Gaming Corp., Argosy Gaming Co., Boyd Gaming Corp., Penn National Gaming Inc., and Pinnacle Entertainment.

Most of these companies have the resources at hand to consider making acquisitions. Many of them have not done any major acquisition in the past four years and almost all have access to substantial bank facilities. In addition to the need to compete against the new industry megacorporations being created, midmarket casino operators have another reason to join forces: the fear of becoming future acquisition targets for MGM and Harrah's.

Some of these company's have already begun to expand by acquisitions. Penn National, for example, has a $500 million deal in the works to acquire Emerald Casinos Inc., and Boyd Gaming recently purchased Station Casinos for $1.3 billion.

While Harrah's and MGM Mirage are powerful in their own right, the industry dominance promised by their proposed acquisitions has not yet come to pass. Both mergers are subject to review by federal officials and state regulators and the companies are likely to be required to make concessions in order to complete these deals. Nevada regulators may have a particularly complex task in overseeing the deals. If both deals go through, two companies will own 15 of the 32 hotel properties on the Vegas Strip.

Nevada isn't the only state where the mergers will create regulatory issues. A recently passed Indiana law forbids casino companies from holding more than two of the state's ten gambling licenses. Harrah's acquisition of Caesars would give it a third license in the state, Caesars' riverboat casino on the Ohio River in Harrison County, Indiana.

The Harrah's deal would also give the company control of five of the twelve casinos in Atlantic City. Caesars currently controls 34 percent of the Atlantic City market. The combined Harrah's-Caesars would control nearly one in every two slot machines, half the town's total gaming space, and half of its nearly 13,000 hotel rooms. According to Dan Heneghan, a spokesman for the New Jersey Casino Control Commission, Harrah's will have to file a petition seeking a ruling on whether the merger will result in "undue economic concentration" in Atlantic City's casino industry.

It is clear that consolidation is occurring at the highest reaches of the gambling sector. But how these deals will shape the industry will depend on regulatory decisions. Smaller casino operators will likely conduct their own mergers and acquisitions in response to the larger deals, although the final results of the big deals may have an impact on the size and shape of these transactions.

Sources: Investment Dealer's Digest, Knight-Ridder Tribune Business News, Tradeshow Week

By Andrew Dolbeck

Editor