Mega Mergers

The big get bigger in Vegas, baby, but what does it all mean?

By: Kathy Espin

LAS VEGAS - The biggest casino companies in this larger-than-life town want to get even bigger.

MGM Mirage is aiming to buy Mandalay Bay Resorts. Harrah’s Entertainment wants to merge with Caesars Entertainment.

As the big get bigger, what does it mean for travel agents and their clients? The answer, of course, depends on your perspective.

First, here’s a scorecard on the status of all wheelings and dealings.

MGM Corp., led by billionaire developer Kirk Kirkorian, you may recall, bought out Mirage Corp. in 2000 to form the largest gaming company in the world, MGM Mirage, with 12 properties owned outright and a significant stake in two others including one in the U.K.

Kirkorian and company, never known to do things in a small way, announced in early June that negotiations were under way to buy out Mandalay Bay Resorts for about $7.6 billion including $2.8 billion in outstanding debt.

The combined companies would rule 28 properties nationwide including 36,500 hotel rooms out of 74,000 in Las Vegas, more than 40 percent of all slot machines and about 44 percent of all table games in town.

Then, in mid-July, it was learned that we hadn’t seen anything yet. Harrah’s announced it would buy out Caesars Entertainment for about $10 billion to reign over 53 properties worldwide with annual revenues of $9.4 billion.

Both deals are pending approval by the Federal Trade Commission and gaming regulatory organizations in dozens of jurisdictions across the country and a couple of foreign nations but the leaders of the respective companies say there is no hurdle too large to overcome.

“We’re in Nevada, New Jersey, Mississippi and Indiana; we are talking about quite a few regulatory approvals we need and some regulators may express concerns,” said Davie Strow, assistant director of external communication for Harrah’s. “At this point we are cautiously optimistic that we won’t run into any difficulties that would halt the process.”

The merger is expected to go through in about a year, he said.

“The one [problem] we know we are going to have to address is in Indiana,” Strow said. “Indiana currently limits operators to two licenses. We have Harrah’s East Chicago and Horseshoe Hammond. Now we’ve just acquired Caesars Indiana. We are prepared, if requested, to divest one of the Indiana properties.”

The MGM Mirage/Mandalay Bay merger will face similar problems in Michigan, according to Jim Murren, president, chief financial officer and treasurer of MGM Mirage. But in a conference call with stock market analysts in June, he said the company is determined to see the deal close by the end of the first quarter of 2005.

The FTC might have a few things to say about that. By the end of July, the trade commission was asking for more information on the MGM Mirage/Mandalay Bay deal to examine possible anti-trust issues the merger might create in Las Vegas. If the FTC has problems with the MGM Mirage deal, the Harrah’s deal could be in bigger trouble. The Harrah’s/Caesars merger would give the combined company six major properties near the intersection of the Las Vegas Strip and Flamingo Road including Rio just a couple of miles to the west.

The travel industry has seen its share of consolidations. Often it works look at Carnival Corp. and its 12 brands. Other times, the brands become lost in the mega-corporation. Travel agents have in the past been leery of these mega-mergers, although they have seen some successful consolidations. Consumers quite often don’t know who owns what, and as long as their hotel brand remains what they like, they don’t care.

One major travel agency based in Las Vegas, Prestige Travel, books about a million room nights a year in Sin City.

“It’s definitely going to impact my business,” said Leo Falkensammer, vice president and CFO of Prestige Travel. “Whatever happens at the MGM, they are going to effect those same rules at Mandalay Bay.”

But the impact won’t necessarily be negative, Falkensammer said.

“I would rather deal with two people rather than one large company, but I don’t see how it will have a negative impact on the customer,” he said. “Look at the cruise companies. I think they have all become a lot more professional as they have gotten bigger.”

With the merger of Boyd Gaming Corp., owner of the Stardust and several downtown and off-Strip properties, and Coast Casinos Inc., which owns the Barbary Coast on the Strip and three off-Strip properties, there will now be three large companies “beating up on each other” and the competition will remain stiff, Falkensammer said.

Fredie Arroya, a travel agent with America’s Vacation Center in Escondido, Calif. said she welcomes the change.

“Honestly, I don’t think there will be any impact,” she said. “The cruise companies merged and it didn’t make any difference. I think it’s for the better. They can provide more amenities and probably the prices will go down.”

Harrah’s Strow points out that the merger would give consumers more options and more places to drive up frequent-player points.

“Suppose you are a gaming customer in Southern Louisiana, for example,” he said. “As a Harrah’s customer, we will now be able to offer you an incredible array of casino offerings. For your play in Southern Louisiana, we will able to offer you a trip to Caesars Atlantic City.” MGM Mirage President J. Terrance Lanni said similar things about that company’s expansion during the June conference call.

“These properties, as you all know, cater to a very broad customer base, ranging from value oriented to the ultra-high end and chic properties,” he said. “And each provides a unique customer experience through its specific offerings, including, obviously, gaming, retail food and beverage and entertainment.”

Both companies will also wield unprecedented marketing might with huge customer databases that can be used to fill rooms with known customers with proven purchasing (and gambling) power.

But, no matter how big the companies get, you don’t have to worry about price gouging or so they say.

“We want to emphasize that, even once these transactions have been completed, the Las Vegas Strip is going to remain a competitive market,” Strow said. “We believe the laws of supply and demand are going to continue to be in play here.”

In other words, no price fixing. “And you can quote me on that,” he said. “We will set room rates in response to market demand.”

Hal Rothman, chairman of the University of Nevada-Las Vegas history department and author of several books on the Las Vegas hospitality industry, said he also sees the impact on consumers as minimal.

“I don’t think costs will rise,” he said. “Maybe it will be a market with fewer competitors but there is lots of competition globally. People have to choose Las Vegas over New Orleans, the Bahamas and Singapore and others. It has to stay competitive in a larger sense rather than a local sense.” Rothman also sees the mergers as an opportunity for smaller, specialized properties to grab a foothold.

“You’ll see the continuation of high quality of service and amenities that they [the major resorts] have always had,” he said. “The bigger companies will absolutely continue to pay attention to details but there might be less imagination applied to the process. That leaves an opening for niches down in the market.”

Rothman cited properties such as the Palms, the Hard Rock and the Golden Nugget as being in a position fill a demand the larger properties cannot.

“I don’t think the niche properties have anything to worry about,” he said. “The reason they are niches is because they don’t make enough money to be valuable to the big companies. I see the big companies selling off their niche properties. As the bar goes higher, there is more room at the bottom for the niche properties.”

Bill Thompson, a local gaming expert and professor of public administration at UNLV, also had encouraging words for the mega-deals.

“The two mergers will bring better services and better products to the resort tourist coming to Las Vegas, and like the situation when Wal-Mart comes to town, prices do not go up, they come down,” he said. “As the merged properties make Las Vegas even more attractive and more of a bargain, to me it’s a win-win game.”

Thompson said he also thinks concern about price fixing is unwarranted. “The state and federal authorities will let this thing go through as their concern will be on whether the giants will engage in predatory practices with the other casinos and since the other casinos include the likes of [Sheldon] Adelson [owner of the Venetian and the Sands Convention Center] and [Steve] Wynn [currently building the 2,500-room Wynn Las Vegas], I don’t think there will be predatory practices not successful ones anyway.”

From the beginning, known locally as the “Mob” or “Good Old” days, Las Vegas has been an open town where anyone with the money could open a casino. Now, Thompson holds, it will take smarter, more sophisticated operators to compete making Las Vegas more attractive to Wall Street and thus encouraging growth.

“The merged properties will cause more people to come to Las Vegas, and the other properties will receive spill-over benefits,” he predicted.

Las Vegas has always been a company town and over the last two decades it has increasingly evolved into a corporate town. Twenty years ago, before Las Vegas went public, hotel rooms, dining and other amenities were considered loss leaders that brought in players for the slots and table games where the real money came in. In those days, 80 percent or more of a gaming property’s revenues were from gaming.

Not so today. Lanni pointed out that MGM Mirage derived about 50 percent of revenue from non-gaming sources and Mandalay Resort Group’s gaming outlets brought in about 40 percent of the take. The corporate mentality is that every department must pay its way and provide a source of income, thus making shareholders and potential investors happy.

But that mentality tends to foster generic products. Could there come a time when every casino one walks into looks just like every other? Some say that trend has already begun, especially with Harrah’s, which strives for a uniform experience across its vast holdings.

Will there be a standard price point that everyone will be forced to adhere to? Strong competition for the travel dollar will force Las Vegas to remain competitive especially as other gaming jurisdictions open up across the country. Travel agents may feel a pinch in availability as resorts turn to in-house marketing to known customers.

“I think the trend has been toward database marketing for more than a decade,” said UNLV’s Rothman. “That kind of marketing has been a focal point. The result is, with better data, they are going to be better able to target potential visitors.”

The good news is that as the market becomes more complex and availability grows in the higher-end luxury market, more customers will turn to travel agents for expert advice and specialized service.

“That’s another kind of niche specialization,” Rothman said. “People who get paid for their expertise. Travel agents have a kind of expertise that can’t be matched elsewhere.”


Developer plans to build hotel tower with no casino

Don’t count out The Donald.

Two major mega-mergers may be under way, but that won’t stop Donald Trump from making his very big mark on the Strip.

Trump and his partner, Frontier Hotel owner Phil Ruffin, plan to build a $300 million, 64-story hotel and condominium tower on a portion of the Frontier property, adjacent to the Fashion Show Mall and the new Steve Wynn property.

Trump says the 645-foot tower will be the tallest building in Las Vegas.

The tower will be patterned after the Trump International Hotel and Tower in Manhattan. At this point, Trump said the Las Vegas property would not have a casino.

The tower will have 1,000 condominium hotel units ranging in size from 636 to 1,057 square feet. It also will have 50 residences. The hotel and residential sections will each have a separate lobby.

The tower will be clad in 24-karat gold glass with white accents.

Construction is scheduled to start early next year, with completion expected to take 18 months. Clark County commissioners will examine the plans for possible approval in October.

The development will also have a spa and restaurants.