Considering its financial difficulties, you would think executives at Caesars Entertainment (NASDAQ:CZR) would cool their spending plans for a while. Their biggest subsidiary is in bankruptcy, and the newly built High Roller in Las Vegas -- the centerpiece of a $550 million investment in Sin City -- looks like a disaster a year into operation.
Instead, they're pushing forward on a $126 million convention center investment in Atlantic City, a city that's watching casinos go bankrupt left and right. It could be a brilliant "buy at the bottom" move if the city recovers, but there are no signs that will happen, and this could just be the latest instance of Caesars Entertainment making terrible investments in failing gaming markets.
Atlantic City is a disaster
I can't see why any company in its right mind would invest a dollar in Atlantic City today, much less $126 million. The city's gaming revenue has dropped 44% since 2007, and everything from room revenue to entertainment is struggling. Despite an economic recovery nationwide, there's no sign that Atlantic City will ever recover, especially when you look at expanded gaming in Pennsylvania, Connecticut, New York, and Massachusetts.
Caesars' argument is that Atlantic City gets just 1% of the $16 billion convention and meeting business in the Northeast. If it can pull just a percentage point or two more it could revitalize the region.
But what reason do we have to think anyone wants to move meetings to a decrepit Atlantic City? New York is the financial hub of the country and attracts meetings based on that fact alone. Boston is also an attractive market in finance, tech, and even tourism, hence Wynn Resorts (NASDAQ:WYNN) building a $1.6 billion resort there.
The problem for Caesars is that it doesn't have the capital to win licenses in attractive markets like Boston, Singapore, or Macau. Instead, it is throwing money after saving its three failing resorts in Atlantic City, hoping it will bring a little new revenue to the region. But what confidence should we have that Caesars' investment will pay off?
Don't bet on Loveman
In gaming, the head of the organization usually drives the vision for a company, and can earn the benefit of the doubt from investors. At Wynn Resorts, when Steve Wynn says he wants to spend $1.6 billion to build a casino in Boston, we shrug and assume he'll make it work. When Sheldon Adelson at Las Vegas Sands (NYSE:LVS) pushed forward with his Singapore resort and resorts on Cotai as his company was teetering near bankruptcy, he earned legendary status in the industry. And for most of MGM Resorts' (NYSE:MGM) history, Kirk Kerkorian was heavily involved in the big moves that made it into the giant it is today. These leaders have earned some leeway when it comes to investments that may not seem ideal on the surface.
At Caesars, Gary Loveman has overseen the leveraged buyout of the former Harrah's that loaded the company with debt, failed to obtain a gaming license in Macau or Singapore, led the company to billions in losses over the last five years, and watched his company's biggest subsidiary go into bankruptcy -- which could bring the entire company into bankruptcy if creditors get their way.
There's essentially no reason to give Loveman or any of Caesars' executive team the benefit of the doubt concerning an investment in Atlantic City. They've proven the ability to lose money in a gaming industry where neighbors on the Las Vegas Strip are thriving. The last example was the High Roller, a ferris wheel on the Las Vegas Strip that was selling discounted Groupons just months after it opened.
I don't see this as anything more than another bad bet for Caesars Entertainment, something that's become a trend for this gaming giant.