Caesars to Potentially Close an Atlantic City Property

Posted on May 12th, 2014 by Robert DellaFave

Caesars to Potentially Close an Atlantic City PropertyAt a recent earnings conference, Caesars CEO Gary Loveman suggests the possibility of closing one of Caesars four New Jersey-based casinos.

For the past six years, New Jersey’s fabled casino industry has found itself mired in a tumultuous downswing that has seen its once healthy profits margins all but dissipate. As the largest provider in AC, Caesars – which owns four out of the Garden State’s 11 existing casino properties – has borne the brunt of the windfall. And according to CEO Gary Loveman, something must be done to stop the bleeding.

During last Wednesday’s earnings conference call, Loveman indicated that Atlantic City is Caesars Entertainment’s biggest concern, stating that the company is looking at all of our options to continue to reduce the cost of doing business… What Loveman fails to specify, and what Caesars would refrain from answering, is what course of action the company will pursue next.

Caesars has Three Options: Buy, Sell or Close

At $23 billion and counting, Caesars Entertainment has accumulated more debt than most small countries. Thus far, the company has taken several steps to reduce its overwhelming burden, most notably by selling off the Claridge hotel tower portion of Bally’s AC, and closing its Tunica, Mississippi property. But it appears that the need for more drastic change is necessary.

Caesars currently has three options. The most conservative would entail selling one of its AC properties (Harrah’s, Bally’s, Caesars and Showboat) to an outside buyer. Alternatively, it could buy out an existing Atlantic City property, salvage it for assets and promptly shut it down. By doing so it would reduce cannibalization within Atlantic City’s oversaturated casino market.

Caesars has walked a similar road before. Earlier this year, Caesars and Tropicana purchased the now defunct Atlantic City Club, together spending $23.8 million. On its own, Caesars would pay $15 million for the Club’s 801-hotel and fittings. The company has no plans to resume operations at the facility.

Lastly, Caesars could close one of its underperforming properties, thereby cutting costs and eliminating internal competition. Should this happen, it could be a done deal as early as late-2014.

Atlantic City’s Struggles Continue, but why?

Caesars AC properties have experienced a year-over-year net revenue loss of 14 percent, and while some of that can be attributed to the record breaking snowfalls that buried the Garden State, as a whole, Atlantic City reported its lowest revenue take in 25 years. It is suspected that this trend will continue.

As a whole, the United States casino industry has struggled mightily since 2008, when the economic downturn led to mass foreclosures, corporate takeovers and lenders tightening their belts. Atlantic City has had a particularly tough time, as competition from Pennsylvania’s burgeoning casino market has had a mighty impact on its already falling revenues.

A recent Pennsylvania gaming study conducted by Econsult Solutions clearly illustrates just how much of PA’s casino revenue is derived from out-of-state patrons, particularly those from New Jersey. Within the past several years, gamblers from Philadelphia, New York City and northern New Jersey have newer, closer casino alternatives – and they’re taking advantage of it.

Which Atlantic City Property is Most Likely to Close?

Based strictly on the numbers, Bally’s took the biggest hit, with revenues dropping 17 percent from the year prior. That being said, Bally’s recently opened a 42-table WSOP branded poker room. The casino also holds the license for WSOP.com, which is the Garden State’s second largest poker network, and best performing standalone site. Given the cross promotional opportunities a relationship with the WSOP affords, it seems unlikely that Caesars would abandon Bally’s.

Harrah’s is one of the top grossing casinos in Atlantic City. Caesars performs less admirably, but it’s difficult to see Caesars Entertainment closing its flagship brand.

That leaves the Showboat. At $225 million, the Showboat brought in less revenue than all of the company’s New Jersey properties. It also exhibited year-over-year losses of approximately 14 percent – about on par with losses sustained by Caesars’ Atlantic City holdings as a whole. All things considered, it would appear that the Showboat is the most likely candidate to fall victim to New Jersey’s plunging casino revenues.

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