EDITOR'S LETTER: Can I get an "Amen"?
November 1, 2010
In spite of the dismal state of the U.S. economy and the damage this is wreaking on valuations, or perhaps because of it, some of the industry’s leading names appear to have decided that now is as good a time as any to test the public’s appetite for risk. The big news, as I write this, was Harrah’s Entertainment filing with the SEC to take a portion of the company public with a share offering aimed at raising as much as $575 million. It’s a gutsy move as things stand currently. Gaming assets are wearing their prices down around their ankles. A marquee property like the Borgata is worth less than half of what it cost to build, based on the $250 million MGM Resorts says it’s been offered for its 50 percent stake in the $1.1 billion gambling palace. Las Vegas’ $1 billion M Resort, not 18 months old, went to Penn National last month for $230.5 million, a price representing about 26 cents for every dollar of its debt. Resorts Atlantic City was sold out of foreclosure in September to an investment group led by Dennis Gomes for $35 million, the lowest price ever paid for a casino in the seaside resort. Morgan Stanley has written off all of its $1.2 billion investment in Atlantic City’s unfinished Revel. And let’s not forget the unfinished $2.9 billion Fontainebleau - “Uncle Carl’s Furniture Barn,” as it’s been roasted in the local press. Harrah’s has $23 billion in long-term debt and net losses through the first half of the year exceeding $460 million. Factor in the scary multiples implied by the above, and it’s understandable that some observers are skeptical of a public offering. “We are concerned that Harrah’s isn’t investing enough in its properties, which will hurt its competitive position over time,” Moody’s Investors Service said in a mid-summer report. “Additionally, management seems more interested in jump-starting growth initiatives than in reducing debt.” Analyst Barbara Cappaert of KDP Investment Advisors, commenting on the IPO in a research note, said, “We have not been a fan of this company mostly because of the high leverage and the opportunistic exchanges that have not necessarily benefited bondholders. However, we are willing to concede that in the right window, more likely 12 months, Harrah’s may be able to pull it off.” It isn’t like Harrah’s doesn’t have all kinds of properties to sell to fund its capital expansion plans. The problem is the low-ball prices they’re likely to fetch. Fire sales have tremendous appeal for horse traders like Icahn and John Paulson, but they drive bondholders crazy. Then again, just a week before Harrah’s told the SEC of its plans, MGM was able to leverage a monthly jump in gaming revenue on the Las Vegas Strip to quickly bang more than 40 million shares out the door in a secondary offering good for $511 million. What happened was, Strip win was up 21 percent in August, a big number, obviously, driven once again by record baccarat play, and that lit a fire under the shares. When the sale was announced, existing shareholders took an 11 percent hit right out of the box, the stock’s biggest drop in almost a year, but at that point MGM already had broken $13. The company was able to price the offering well below the previous day’s close and still get $12.65, and this in the face of an expected $206 million third-quarter loss. Of course, as I write this, those who bought in are under water to the tune of about $1.50 a share. But there you go. The deal has inspired some analysts to suggest that a sustainable recovery in major market revenues isn’t needed to put the mojo back into gaming stocks. A dollar or two in room rates will do the trick, they say. What we’re seeing, the longer our shared economic pain lasts, is terms like “recovery” and “sustainable” becoming more and more susceptible to interpretation until they’re as nebulous as we need them to be. In the Church of Wall Street, faith can move mountains. It’s why half-billion-dollar stock floats are all about timing, as Harrah’s well knows. That and perception. And a steady influx of wealthy Chinese.