Saturday, April 19, 2003
Copyright © Las Vegas Review-Journal

GAMBLING IN THE UNITED STATES: Growth chances shrink

Casino experts pessimistic about domestic gambling market

Las Vegas gaming executives are beginning to admit a tough new reality about casino ventures in the United States.

The executives are pessimistic about domestic growth opportunities after Illinois and New Jersey governors recently pitched substantial gaming tax increases.

MGM Mirage Chairman Terry Lanni, Wynn Resorts Chairman Steve Wynn and Millennium Management co-owner Bill Paulos said recently that proposals to increase casino taxes from Illinois Gov. Rod Blagojevich and New Jersey Gov. James McGreevey make it clear that domestic casino opportunities are no longer as rosy as many once thought.

Blagojevich on March 10 proposed increasing Illinois' highest-in-the-nation 50 percent top casino tax rate to 70 percent, with additional fee increases thrown in. McGreevey proposed a 25 percent increase in New Jersey's 8 percent casino tax rate, up two percentage points to 10 percent, plus a 7 percent occupancy tax on all Garden State hotel rooms.

In a recent conference call for industry analysts and investors, Lanni said the company has "less" interest in Illinois' final license because of the governor's proposed tax rate. He then debunked the notion that MGM Mirage is counting on new U.S. jurisdictions for growth.

"I think there are very few opportunities for growth in the U.S.," Lanni said. "It's a mature industry in the U.S."

Wynn agreed.

"The lesson is that you better be in a place where gaming is vital to the state's economy," Wynn said Thursday. "Mississippi, Nevada, Macau. Places where the jobs and other economic benefits are understood. Everywhere else is a risk."

That doesn't mean other jurisdictions aren't worth the risk, he said; it means that expected returns have to be better to justify the investment when there is a risk of tax increases.

One jurisdiction, the nation's second to allow state-regulated casinos, may no longer be in the camp of the gaming investment-friendly states after its governor proposed his casino tax boost, Wynn said.

"New Jersey's on the cusp, because the casino industry's become so important to South Jersey, and the governor's proposal is for a relatively small increase," he said. "There's already a substantial capital investment there."

Deutsche Banc casino industry debt analyst Andrew Zarnett said Friday that Lanni and Wynn are understandably skeptical about the reliability of new gaming jurisdictions.

"Some states understand the industry and its contributions," Zarnett said. "Others treat it like a traditional sin tax and they abuse it."

In both states, the ultimate fate of the tax proposals remains in doubt, Zarnett noted, predicting that domestic growth prospects will look better if, as expected, the governors find other ways to fund budget shortfalls.

Wynn and The Venetian's Sheldon Adelson are already licensed to open casinos in Macau, and Lanni cited potential overseas opportunities in the United Kingdom, Thailand and Macau as more interesting to MGM Mirage than domestic prospects.

Paulos and his partner, Bill Wortman, are actively pursuing potential opportunities in Mexico.

Zarnett predicted domestic slim pickings could lead to another form of growth: significant mergers and acquisitions.

"The lack of (domestic) opportunities, confirmed by the lack of progress in new jurisdictions, will lead to the next wave of consolidations," Zarnett said.

Paulos said casino companies have to grow, and that if new jurisdictions don't open and existing jurisdictions start squeezing profit potential, they'll begin eying each other as takeover targets.

"You'll start to see some deals pretty soon," Paulos predicted.