For Las Vegas casinos, the chips are down

Business Times - 28 Nov 2008

For Las Vegas casinos, the chips are down
Debt-laden casinos offer discounts to draw cash-strapped consumers

(LOS ANGELES) Las Vegas casino operators, faced with heavy debt loads and dwindling business prospects, have begun to reshuffle their offerings to appeal to cash-strapped consumers. That will mean even thinner bottom lines for the once high-flying companies.
Las Vegas became famous over the past several years for luxury hotel suites, celebrity-chef restaurants and high-end shopping, but the sharp downturn in consumer spending has refocused attention on the need to rein in prices.

'American consumers are in a bit of a bunker mentality,' said Michael French, head of PricewaterhouseCoopers gaming advisory practice. 'Casino operators are going to have to be very creative in their approach. (They) are going to make less money than in the past.'
Current bargains include rates below US$60 a night for four-star properties in Las Vegas like MGM's New York New York or Mirage, where it was tough to find a room below US$200 a year ago. According to the Las Vegas Convention and Visitors Authority, the average citywide daily room rate fell 20 per cent in September alone.

On top of that, MGM is also offering an additional 20 per cent price cut on most merchandise at its stores over the Thanksgiving holiday weekend. Through the end of the year, Harrah's Entertainment is giving new members of its loyalty programme a US$100 credit for playing the slot machines.

'The risk is that you start to train customers to expect discounts,' said KeyBanc gaming industry analyst Dennis Forst. 'It's like the McDonald's dollar menu - once they started it, they couldn't get rid of it.'

Casino companies have been slammed by the combination of weak demand for gambling and a lack of credit to fuel ambitious expansion plans. Shares of companies like Las Vegas Sands Corp and MGM Mirage have fallen 97 per cent and 87 per cent, respectively, from 52-week highs set last December.
High-cost or earnings-diluting financing - like a US$1 billion cash infusion from Sands' chief executive, Sheldon Adelson - has been used to raise capital in order to finish projects already under way.

Development plans have been shelved indefinitely - even partially built projects like Boyd Gaming's US$4.8 billion Echelon on the Las Vegas Strip have been halted.
'After 2009 there will be virtually no new supply for five years, maybe longer,' Mr Forst said.
But before then several new luxury resorts will debut on the Strip, including Wynn Resorts's Encore in December and MGM's massive CityCenter complex late next year. That will put further pressure on room rates, particularly for similar-strata properties like Wynn, MGM's Bellagio and Sands' Palazzo and Venetian resorts.

'I do believe people who have started significant projects would be wise to rethink the broader market,' Mr French said.
Las Vegas visitor volume fell by about 2.4 per cent through the first nine months of this year, but the year-on-year drop was more than 10 per cent for September alone, according to the city's convention bureau. The average hotel occupancy level fell to 88.6 per cent in September from 94.2 per cent in the same month a year earlier.

'Most operators will need to resize and reposition their product to react to a recalibrated consumer,' Deutsche Bank debt analyst Andrew Zarnett said in a research note.
He estimated that over the past three years, Las Vegas operators have spent more than US$6 billion on new projects - at financing priced well below current market levels which will eventually have to be refinanced, likely at a higher cost\. \-- Reuters