New Casinos? Buy the Equipment Makers

Foxwoods and Mohegan Sun Face Coming Threats from Massachusetts and New York Casinos

by Elliott Morss, Morss Global Finance

Introduction

US gambling casinos are in trouble. The two largest casinos in the world, Foxwoods and Mohegan Sun (both in Connecticut), have real problems. With $2.3 billion in debt, Foxwoods is struggling. It just reported August 2012 slot revenue of $50.5 million, a 3.3% decline compared to the same month a year ago. Foxwoods is not bullish on its gambling market. So it is building a 300,000-square-foot retail center, including space for 75 outlet stores. Mohegan Sun? It is having to deal with $1.6 billion in long term debt.

As Table 1 indicates, US casino gambling revenues continue to fall. In Las Vegas, total gambling revenues are down 16% since the July to June 2006 – 2007 year, with slots revenues down even more. Both Connecticut casinos are doing worse with slots down 25% and 24% for Mohegan Sun and Foxwoods respectively.

Sources:  Nevada Gaming Control Board and Connecticut Gaming Division

As I have suggested in an earlier piece, things will probably get worse for the Connecticut casinos as new casinos are built in Massachusetts and New York.

MA Casino Candidates

In MA, the new law gives the Gaming Commission the power to permit up to three full resort casinos, one each from Boston to Worcester (Region A); Western Massachusetts (Region B), and a southeast region (Region C). In addition, a slots-only casino could be located anywhere in the state. So what are we looking at?  In Table 2, I assembled what we know already about potential bidders from their announcements. The second from the left column indicates how much will be invested while the last column indicates how far they are from Montville/Ledyard CT, the respective homes of Mohegan Sun and Foxwoods (8 miles apart), respectively.

Sources:  Various news releases

Casino applicants must pay a non-refundable $400,000 fee to the Massachusetts Gaming Commission to begin the process. The deadline for paying the application fee is mid-October 2012. So far, fees have been paid by the applicants for Suffolk Downs, Plainville, Taunton, and Springfield (MGM).

The key point to take away from Table 2 is that all three regions are near the Connecticut casinos. It is estimated that 30% of the Connecticut casino customers come from Massachusetts. Many of these will switch to the MA casinos. In addition, the MA casinos should attract come of the other CT casino customers.

NY Developments

Things are moving a bit slower in NY than MA. But Governor Cuomo is negotiating a pact with Genting BHD (Kuala Lumpur:3182.KL) to develop a $4 billion convention center and resort with a casino attached at the Aqueduct Racetrack in South Ozone Park, Queens. Aqueduct is only 131 miles from the two CT casinos.

Who Benefits

Will the new MA and NY initiatives generate additional markets or is this really all about splitting the revenues now going to the CT casinos three ways? Probably the new supply will create some new demand. But one thing is certain: the CT casinos will lose some customer base to MA and NY. That means some of the gambling revenues now being collected by the CT government will be split with MA and NY governments.

The other definite winners are the companies making the slot/VTL machines: Lottomatica Group S.p.A. (OTC:LTTOY), Multimedia Games Inc. (NASDAQ:MGAM), and American Gaming Systems (privately held). These companies benefit from the sale of their products and not how extensively they are being used. And with state revenues being squeezed throughout the US, other states will be turning to gambling for additional revenues as well.

©2012 by Elliott Morss

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About the Author

Elliott Morss has a broad background in international finance and economics. He holds a Ph.D.in Political Economy from The Johns Hopkins University and has taught at the University of Michigan, Harvard, Boston University, Brandeis and the University of Palermo in Buenos Aires. During his career he worked in the Fiscal Affairs Department at the IMF with assignments in more than 45 countries. In addition, Elliott was a principle in a firm that became the largest contractor to USAID (United States Agency for International Development) and co-founded (and was president) of the Asia-Pacific Group with investments in Cambodia, China and Myanmar. He has co-authored seven books and published more than 50 professional journal articles. Elliott writes at his blog Morss Global Finance