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Would Revel Give Caesars an Atlantic City Monopoly?

January 31, 2014
Would Revel Give Caesars an Atlantic City Monopoly?

There have been rumors about a potential acquisition of Revel by Caesars Entertainment, according to Bloomberg Businessweek. This is an interesting topic. Revel has been looking at strategic options, meaning a sale or bankruptcy, since late last year.

This rumor has not been substantiated at this point.  The companies have offered no comment about the speculation.

The concern of unfair competition has already been raised by a New Jersey state senator. We decided to dig into the numbers to determine if the there would be anti-competitive issues if the rumors turned out to be true.

Caesars Entertainment seems like an odd match for Revel. Most Caesars Entertainment properties are regional casinos aimed at local gamblers. Its Las Vegas properties range from high end Caesars Palace to the Quad, a casino that routinely gets low marks from guests. Most Caesars Entertainment resorts are considered mid tier.

Revel’s Struggles

Revel’s construction cost was $2.4 billion. It was valued at just $506 million at the end of the 3Q 2013, according to a filing with the New Jersey Division of Gaming Enforcement (DGE). That is less than half the value posted in 3Q 2012.

Revel posted a $30.7 million loss from operations in 3Q 2013. Its operating losses through the first nine months of 2013 were $156.5 million. Revel’s management team is now looking for a way to cut its losses through an exit strategy.

Revel placed seventh in 2013 gaming revenue among the 11 Atlantic City casinos. It generated 40 percent of its revenue from non-gaming sources in 3Q 2013, including hotel rooms and restaurants. The Atlantic City non-gaming market average is 30 percent, according to the DGE.
All four of Caesars Entertainment’s properties in Atlantic City posted better results through 3Q 2013, the last publicly available disclosure.

Caesars Entertainment Finances

Caesars Entertainment is $21.54 billion in debt, according to its latest SEC filing. The company lost $637.5 million just from operations for the three month period ending September 30, 2013. That does not include $563 million in interest payments. When accounting for that interest, an offset in income taxes and other items, the company lost $761.4 million in the quarter.

The company posted a net loss of $1.2 billion for the first nine months of 2013. This included just under $2 billion in interest payments on its massive debt.

These numbers make it hard for Caesars Entertainment to acquire any property. The interest expenses keep the company in the red.

Monopoly Concerns

The board game Monopoly was based on Atlantic City so it is only fitting that there are gaming regulations that address the issue.

Section 19.43-3.1 of the Casino Control Act is titled “Undue economic concentration”. It states, in part:

(c) In determining whether the issuance or holding of a casino license by a person will result in undue economic concentration, the Commission shall consider the following criteria:

1. The percentage share of the market presently controlled by the person in each of the following categories:

  • i. The total number of licensed casinos in this State;
  • ii. Total casino and casino simulcasting facility square footage;
  • iii. Number of guest rooms;
  • iv. Number of slot machines;
  • v. Number of table games;
  • vi. Net revenue;
  • vii. Table game win;
  • viii. Slot machine win;
  • ix. Table game drop;
  • x. Slot machine drop; and
  • xi. Number of persons employed by the casino hotel;

Section (i) – The total number of licensed casinos in this State

This is easy to determine. Caesars Entertainment owns four of Atlantic City’s 11 casinos. That is 36 percent of the operating casinos. Revel would bump that number up to 45 percent.

Section (ii) – Total casino and casino simulcasting facility square footage

Caesars Entertainment currently holds 37.9 percent of the 1.27 million square feet of total Atlantic City casino floor, for a total of 480,843. Revel would add 10 percent to that share. Revel does not offer simulcast racing.

Section (iii) – Number of guest rooms

Caesars Entertainment has 6,809 hotel rooms in Atlantic City, a 38.6 percent share. Revel would add 1,399 rooms and a 7.9 percent share.  There are 17,639 hotel rooms operated by Atlantic City casinos.

Section (iv) – Number of slot machines

There are 8,417 slots at the four Caesars properties in Atlantic City. This gives the company a 35.6 percent market share. Revel would add 2,251 slots and a share of 9.5 percent.  There are 23,664 slots in Atlantic City.

Section (v) – Number of table games

Caesars Entertainment operates 608 table games. This is 40 percent of the combined 1,519 tables spread in Atlantic City. This includes poker. Revel would add 110 tables, giving Caesars Entertainment a 47.3 percent share.

Section (vii) – Table game win

Caesars generated about $336 million from its table games, including poker. That was 43 percent of the Atlantic City market. Revel would add $58 million, bringing the table game revenue share to 50.5 percent. This number could become a problem as it pertains to a potential monopoly.

Section (viii) – Slot machine win

Slots, including video poker, are the biggest source of revenue for a casino. Caesars generated about $795 million from slots in 2013 between its four casinos. That was 40.9 percent of the slot revenue in all of Atlantic City. Revel would bring that share up to 45.9 percent.

Wild Cards to Consider

Caesars Entertainment could be one of a handful of companies that could fill Revel with gamblers. Its database of players from regional markets is substantial. The question would become whether it would bring in new players or cannibalize the business from its other four properties.

If Revel were not able to find another buyer, and bankruptcy was imminent, the DGE might waive some of the restrictions to keep the property open and jobs alive. The regulations give the DGE a lot of discretion as it pertains to how to handle the market.

The potential that this day would come is addressed, including:

4. The current and projected financial condition of the casino industry;
5. Current market conditions, including level of competition, consumer demand, market concentration, any consolidation trends in the industry and any other relevant characteristics of the market;

There have been rumors of a Showboat sale for years. If that were to occur, it would eliminate any of the anticompetitive concerns.

Speaking of rumors, Caesars Entertainment carries a massive debt-load. Some have speculated that the company cannot make it more than two years without a major reorganization. The spinoff of the interactive company only bought a little time, in the opinion of some pessimists. If Revel were acquired, the property may find itself in the same situation in two years if those fears play out.

Sources Used for Statistics

The statistics used in the article were obtained from press releases that may be found on the DGE website.  Most numbers were current as of December 31, 2013.  Hotel room totals are current as of September 30, 2013.

Fractional numbers were rounded to the nearest one-tenth of one percent. Some revenue numbers were rounded to the closest million.  Atlantic Club stats were not used in this article.  These numbers were removed as the property ceased operations.

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