THE BACK PAGE: Heard at the show
Wall Street and the capital game: The M&A market may be stirring after a sleepy 2009. Thomas Steinhauer, CFO of Ameristar, said Wall Street was pushing his company to look at deals. His interest level was not quite there. One reason: “The cost of capital is still 50 percent higher than it was.”
Scott Schweinfurth, CFO of WMS Gaming, said he was peppered with questions about consolidation on the supplier side of the industry at the Investment Forum on Day 1 of the show.
For new projects capital is still only available on a very limited basis, with 50 percent equity as a baseline and money not priced lower than the low teens, with the SugarHouse deal in Philadelphia standing as a model. “In two or three years 30 percent or 40 percent equity might be possible,” said Matthew Sodl of Innovation Capital, “but it’s 50 percent for the foreseeable future.”
IPOs in Hong Kong will continue, with MGM Mirage probably next.
“Asian investors still like the quality U.S. brands in gaming, and Macau is part of the China consumer play for investors,” said Brian Ng of JPMorgan. Operators such as Melco, SJM and Galaxy are “nice companies,” he said, but they cap out at US$1 billion, whereas Wynn Macau and Sands China, with market caps of $7 billion and $10 billion, respectively, are more interesting.
Fontainebleau continues to be a head-scratcher. Sodl estimated that it will take $1.5 billion to complete and hazarded a guess that it will generate free cash flow of $100 million to $150 million per year, adding that getting financing for whoever buys it will be “very problematic”.
Kevin Coyne of Goldman Sachs noted that gasming consolidation on the operator side “never seems to take capacity out of the market,” even though that could be what is needed in depressed markets such as Laughlin and Atlantic City.
As for Las Vegas, Andrew Zarnett of Deutsche Bank estimated that demand will be up 3 percent to 5 percent next year, but room capacity will be up 15 percent, as will competitive pressure from California. He hopes the industry will emphasize technology to enhance the entertainment experience. “Change on the casino floor is more necessary than new rooms; we don’t need any more new rooms right now.”
Server-based gaming: Ryan Sprague of Ameristar is only buying server-based-ready games right now. Fifteen percent of his floors are server-based-capable. The number is 10 percent at The Venetian, according to Tim Merrill, the property’s director of training and product development. The main advantage of server-based gaming is speed of conversions, said Sprague. Chuck Hickey of Barona said the ability to download peripheral updates is a big plus.
The holy grail for server-based gaming, however, remains benefits for the player.
“The technology we offer really has to drive game performance and the cashbox at the end of the day,” said Nick Khin of Aristocrat Technologies.
“We’d like to create an experience for players at Barona that players can’t get anywhere else,” said Hickey. “We’re looking for customizing games and experiences for players, and if that stuff might actually be true” about server-based gaming.
Meantime, there are some organizational steps everyone should be taking. Merrill said operators need to start looking at back-room IT infrastructure as they get ready for server-based gaming, and Hickey added that “getting to know your IT staff and to think of them more in terms of casino operators than network guys who sit in a closet somewhere is an important challenge.”
New game sales: There are a number of factors getting in the way of a robust new-game sales market, one of them being the enduring popularity of older games with older players. Hickey noted the fanatical devotion of many of his high-value players to 78 SDG machines that don’t tie into anything more than a slot system.
“Until the older players go away, they aren’t going to play transmissive reels if they can still find a stepper product,” said Merrill.
Sprague and Hickey each said about 30 percent of the machines on their floors are five years or older, and Sprague said he expects his S2000 machines to be around for another five years, so that percentage might not change.
Then, of course, there’s money. Virginia McDowell of Isle of Capri noted that the average price of a slot machine is now around $20,000. She told one slot manufacturer that she could “buy one machine, or take that money, buy chicken drumsticks for a year, put them at a bar and elevate our customer experience.”
“What are we looking for?” said Keith Smith of Boyd Gaming when questioned about new games at the show. “Price.”