Despite Atlantic City needing a bailout from New Jersey, casino operator MGM Resorts International (NYSE:MGM) believes the Borgata can not only survive the city's decline, but that it can thrive. Its deal to buy the 50% stake in the casino it doesn't already own from Boyd Gaming (NYSE:BYD) for $900 million is a big bet that the biggest and strongest gambling hall can withstand the storm.
The best of a bad situation
Since its opening in 2003, Boyd says the Borgata has been the best-performing casino on the east coast, and MGM believes its best days are still to come. However, despite the rescue package Atlantic City just got -- or perhaps because of it -- a cloud and a question mark still hang over the property.
Under a package of bills signed by Gov. Chris Christie, Atlantic City will get a series of temporary loans from the state to pay its bills and will be entitled to receive at least $120 million annually from the casinos themselves for the next 10 years. The city also avoids a state takeover for at least five months.
While that bandage gives the city some time to get its act together, it underscores just how dire the situation is in Atlantic City, and it's hard to ignore that while the Borgata may be doing well now, the situation around it may continue spiraling out of control. This isn't the first time the city has had to be bailed out, and since 2005, casino revenues have been cut in half.
Four casinos over the past few years have closed their doors as competition from Pennsylvania, New York, Massachusetts, and Connecticut draw away gamblers that used to only have A.C. to shoot for (although the casinos run by the Indian reservations in Connecticut have also seen their revenues fall).
Competitive pressures are mounting
Online gambling has only been approved in New Jersey relatively recently, and though the Borgata has far and away been the leading player through its licenses for both BorgataPoker.com and PartyPoker.com, Resorts International's PartyPoker.com just went live, and in its first full month of operation, quickly became the No. 2 site. Resorts' monthly gaming win for online gambling is fully expected to exceed Borgata's fairly soon.
Then there's the possibility New Jersey might allow casino gambling in the northern half of the state. Atlantic City has long had a monopoly on casino gambling since it was brought back to the seaside town in the 1970s, but voters in the state will be voting this November on a referendum to allow two casinos to be built at least 72 miles from Atlantic City, and if they're approved, A.C.'s mayor has predicted that at least three of the remaining casinos in his city will close. Sports betting may also come to the state.
While some of these moves ought to help strengthen Atlantic City's casino industry -- online gambling requires the websites be affiliated with a casino with a physical presence in the state, and sports betting could boost revenues -- it's a tenuous situation. Not all measures may pass, and other states may respond similarly to protect their own gambling operations.
Getting while getting is good
Boyd Gaming was smart to cash out now. Of the $900 million sale price, it expects to net $600 million in cash after subtracting out its share of the Borgata's debt. It will also receive half of the $180 million tax windfall the Borgata is expected to receive after a legal case with Atlantic City is settled.
For its part, MGM Resorts is turning around and selling the Borgata to the real estate investment trust it established, MGM Growth Properties (NYSE:MGP), for $1.12 billion, which will then lease it back to the casino operator for rents valued at $100 million annually. MGM Resorts will also be the casino operator.
Although the odds look to be in MGM Resorts favor, and Wall Street seems to almost universally like the deal, its decision to effectively double-down on Atlantic City is no sure bet, and Boyd Gaming's move to fold its hand there seems to be the smartest play.
Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.