Description
Short Boyd Gaming-Boyd Gaming is a mid cap casino operator which owns casinos in las Vegas, Mississippi, Illinois, Indiana and Louisiana. It is building the first new casino since the Taj Mahal in Atlantic City in partnership with MGM Mirage (Borgata). Boyd trades at a premium to almost every other mid cap gaming company and close to in line with larger, better large cap gaming operators. Reasons to short include the high and unachievable expectations for Borgata, threat to Delta Downs from planned Pinnacle property, threat to Blue Chip casino from potential new Native American casino and the out of whack valuation.
Borgata-Borgata is the 2000 room 4200 position property being developed through a joint venture between Boyd and MGM, although MGM is primarily a passive investor. Boyd has been managing the development and will run the casino upon opening. Boyd is committed to an unlimited completion guarantee where it will absorb any cost overruns on the project. Although the property has been billed as a Las Vegas style casino it lacks most of the amenities, shopping and high end restaurants present in most Vegas casinos. In fact, the only nod to the high end other than floor to ceiling windows in the hotel rooms is a small spa. The casino is scheduled to open sometime in the summer of 2003, although talk is before July 4th weekend, and there is a rumor that perhaps they will open the hotel without completing all of the hotel rooms (unconfirmed). This will be the first new hotel in atlantic city since Taj Mahal in 1991. Atlantic City Gaming revenues have grown on average about 3% per year for the last 7 years, and visitation has been flat to slightly down. Many casino companies will tell you this is because it is difficult to get a hotel room in Atlantic City and that this is why Borgata will not have that dramatic an impact on the market-in fact some think it will have a positive impact. However, the last time that there was a significant building boom combined with new jurisdictional competition was in 1995-1996 when a number of new additions were completed in AC (20% growth in the number of Slots in the market in 95/96), and Delaware legalized gaming at racetracks promotional expenses skyrocketed, and gaming win barely increased. Margins across Atlantic City collapsed as operators fought to fill the new capacity they had recently added.
The situation occurring over the next 18 months is eerily similar with pennsylvania highly likely to add slot machines at racetracks within the next 12-18 months (will probably be about 4,000 slots near philadelphia equivalent to approximately 10% of AC's slot base), many operators adding amenities, hotel rooms and additional slot machines, but this time there is also a new property which is adding an additional 10% gaming capacity to the market. Borgata has hired many former Trump casino managers which could incite the Donald to respond aggressively to any attempt to go after his customers. In addition, Borgata has no player database of its own on the East Coast. Instead it will rely on MGM's database-but MGM has no east coast or atlantic city property and it is unclear how valuable this database will be. To drive traffic Borgata will have to aggressively advertise and possibly promote. When the market doesn't grow 10-15% (which it likely won't just because Borgata has been added-people have a finite amount of money to spend on gaming and Borgata's mere presence will not just increase that number 10-15%) other casinos will begin losing customers to Borgata-some just to try it, others because of promotional offers. How will these casinos likely respond-they will begin to promote and offer deals which could spiral into another promotional war.
Finally expectations are for Borgata to generate as much revenue and ebitda as the top performing properties in the market. This will be a challenge considering Boyd has no database, limited experience with the Atlantic City market, and no real brand name or players club to cross promote with, and no existing loyal customer base. The market leaders have all of these things.
Boyd generates approximately 10% of its EBITDA from a racetrack in Louisiana called Delta Downs. Located in Lake Charles, Louisiana which is fed from Houston this racino (racetrack with slots) faces a potentially significant new competitor with the development of Pinnacle Entertainment's new Lake Charles property. Expected to cost approximately $320mm this casino/hotel will add significant new capacity into an already highly competitive market. Opening of this property sometime in 2004 will be bad news for Delta Downs.
Boyd's Blue Chip property in northern indiana on the border of michigan may soon compete against a native american casino conceived by the Pokagon Band of Potawatomi Indians (recognized by Congress in 1994). Two lawsuits have been instigated challenging the proposed project. One challenged the compact signed with the state due to its 11th hour, abbreviated passage. Recently state higher courts in Michigan dismissed this challenge and it seems to be dead. The second challenge is to the environmental impact study conducted by the tribe. Critics assert it was an abbreviated study and a more comprehensive study is required. This is working its way through federal courts, but even if the study is found deficient, the tribe can simply conduct a more extensive study. Opening of this casino in its highly competitive location just north and east of two major highways would be a significant blow to Boyd's Blue Chip property which contributes approximately 30% of Boyd's EBITDA.
Boyd trades at approximately 14x 2002 earnings and 13x next year's optimistic earnings expectation while most of its peers trade between 7-12x. Boyd trades at approximately 6.5x this year's ebitda and 5.8x next year's ebitda after subtracting out analysts' estimated value for Borgata, again at the high end of the group.
Risks to the short are Borgata is a home run and players flock to it while AC competitors do not fight to retain share, and slots in Pennsylvania don't have much of an impact on Atlantic City.
Analysts talk about the value of Borgata's ownership of the Stardust hotel on the Las Vegas strip-any monetization of this could be positive for Boyd.
Pinnacle doesn't develop Lake Charles property.
Catalyst
Miss next year due to Borgata disappointment, late opening, cost overrun
Approval of Pokagon Native american casino in Michigan
Pinnacle's Lake Charles Project