Private Equity

A recent trend in the gaming industry is causing consternation in both the boardrooms of casino companies and the boards of regulatory authorities. The trend is the purchase of several large casino companies by private equity groups. Harrah's Entertainment was recently purchased by two private equity groups, Apollo Management and Texas Pacific. But this is hardly the first private group that has bought casinos, large and small. In fact, the casino industry is founded in private equity. Yes, that funding was sometimes too "private" but the fact remains that family-owned casinos (not necessarily that kind of "family") and small investment groups were the dominant force in the gaming industry until Howard Hughes woke Wall Street up to the industry's profit possibilities. Colony Capital kicked off this trend about 10 years ago when it bought Harveys in Lake Tahoe and sold it several years later to Harrah's. Colony now has a subsidiary, Resorts International, that operates a string of casinos. It has also taken stakes in the now-private Kerzner International, as well as Station Casinos.

But the infusion of such huge amounts of capital—the Harrah's purchase will involved something like $25 billion—has everyone nervous.

Another private group, Columbia Sussex, was the unlikely winner for the Aztar Corp. in 2006. Primarily a hotel company, the newly named Tropicana Hotels & Casinos (in honor of its two flagship properties in Las Vegas and Atlantic City—above), the company has a different operating model than traditional casino companies. Part of the operating model is to cut costs to the bone immediately upon buying a property and then evaluating what is actually needed as they go forward. In both Atlantic City and Las Vegas, Tropicana fired hundreds of workers and was the brunt of criticism from inside and outside the industry.

Regulators have started to become concerned. Neither Nevada nor New Jersey has specific requirements about how many employees a casino must carry to operate a casino. Nor do they have any requirements on reinvesting in a property. Nevada officials are voicing concern that these private equity companies will come in, cut and slash costs, create huge profits and walk away with them while not reinvesting in the property. New Jersey officials are worried that one of the intents of the Casino Control Act is being compromised—the creation of jobs. Both jurisdictions are said to be considering changes in the statutes to address these issues.

That would be a mistake. The strength of the gaming industry in both these states is the hands-off regulatory systems when it comes to the operation of the businesses. Everyone agrees that the industry should be held to certain standards when it comes to integrity, but when you try to regulate how a business operates, that's going too far.

The market should determine how a casino operates. If a company decides to drain a casino of its cash, it also drains if of customers, making it less valuable for any prospective buyer. Yes, the short-term results may be disagreeable, but a new company is bound to come in, buy the property at a bargain price and rebuild it to at least its previous level. Even if that doesn't happen, nothing justifies the intrusion of government into the operation of any company. There are few other industries where this would even be considered. Now this might be understandable if you're talking about companies whose operations affect the public welfare, such as transportation or power companies, but certainly not casinos.