Borgata Acquisition, Revenue Boost MGM Q3 Earnings

The acquisition of the Borgata in Atlantic City had a big impact on the bottom line for MGM Resorts International in the third quarter.

The acquisition of the Borgata in Atlantic City had a big impact on the bottom line for MGM Resorts International in the third quarter.

MGM’s numbers + Borgata

MGM took over full controlling interest in Borgata in August of this year — it used to own 50 percent, alongside Boyd Gaming — for a pricetag of $900 million. That meant the latest earnings report is the first time the AC resort’s numbers would appear on the balance sheet.

That impact was immediately noticeable, with Borgata providing most of the earnings growth. The rest of the core MGM business was relatively flat.

From the earnings report released by MGM:

Casino revenue for the third quarter of 2016 increased 23% compared to the prior year quarter, due primarily to the acquisition of Borgata and an increase in both table games and slots revenue.

 

Slots revenue increased 19% compared to the prior year quarter due primarily to the acquisition of Borgata, and increased 3% on a same- store basis compared to the prior year quarter.

More from Dan D’Arrigo, Executive Vice President and Chief Financial Officer of MGM:

“We remain committed to strengthening our balance sheet and returning MGM Resorts to investment grade as we continue to maximize cash flow and grow the Company in a financially prudent manner.

 

We believe that our strategic actions in the third quarter are aligned with these goals including opportunistically enhancing our capital structure through the issuance of notes at historically low levels, acquiring the remaining interest in Borgata, and increasing our exposure in the largest gaming market in the world through the purchase of an additional stake in MGM China.”

A big difference for MGM shares

MGM reported that earnings per share for the third quarter came in at $0.93 share, or $561.3 million in net revenue. That was a huge change from Q3 of last year, when earnings were just $94.7 million, or 12 cents a share.

MGM attributed $0.60 a share of that increase to a $430 million gain on the Borgata acquisition.

What was the end result of the sum total of the earnings report on MGM stock? From the Las Vegas Review-Journal, “shares of MGM Resorts International gained 77 cents, or 2.92 percent, to close at $27.18 on Monday.”

Things going well overall at MGM

The addition of the full breadth of Borgata’s revenue is just one of developments for the overall MGM business.

MGM National Harbor (in Maryland, near Washington, D.C.) and the Park Theater in Las Vegas are scheduled to open next month. MGM Springfield in Massachusetts is under construction.

It all points to continued growth for the MGM brand in New Jersey and beyond.

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MGM Takes Full Control Of Borgata After Completion Of Sale

MGM Resorts International officially took over full controlling interest of the Borgata Hotel Casino & Spa in Atlantic City for a price tag of $900 million.

MGM Resorts International officially took over full controlling interest of the Borgata Hotel Casino & Spa in Atlantic City for a price tag of $900 million.

The news from MGM completes a deal reported this spring in which MGM was taking over Boyd Gaming Corporation’s 50 percent interest in Borgata.

Details of the MGM – Borgata deal

MGM reported that cash proceeds paid to Boyd for its interest in Borgata totaled $589 million. A portion of Borgata’s outstanding debt of $575 million was refinanced and then assumed by MGM Growth Properties LLC, according to a press release.

MGM CEO Jim Murren had this to say upon completion of the deal:

“As the premier resort in Atlantic City, Borgata is a great addition to our growing presence in the mid-Atlantic and Northeast United States.

 

“We are excited to welcome the talented Borgata leadership team and employees into MGM Resorts and look forward to serving guests with new and exciting opportunities through our diverse resort offerings, entertainment dominance and market-leading loyalty program, M life Rewards.”

And Tom Ballance, President of Borgata:

“We welcome MGM Resorts as the new operator and are excited to further utilize its best-in-class brand to continually bring quality experiences to our guests.”

Logistics of the MGM takeover

MGM now takes over full control over the top Atlantic City property, which generated $812 million in net revenue over the past year when the deal was announced in May.

Previously, Boyd had taken care of the day-to-day operations of Borgata, so that task obviously now falls on MGM.

Borgata customers will eventually be switched over to MGM’s rewards program, but not until a date to be determined in 2016.

MGM, fully invested in NJ

The takeover of a Borgata represents something of an about-face for MGM. Just six years ago, MGM was trying to divest itself from the New Jersey market and was shopping its share of the Borgata.

It also at one point had planned to build MGM Grand Atlantic City a project that was scuttled because of economic conditions.

Now, MGM clearly thinks Borgata and the New Jersey casino resort industry is on solid enough ground to assume full ownership of the property.

MGM and NJ online gambling

MGM comes into full control of Borgata’s land-based interest, but it now also becomes a major stakeholder in the NJ online gambling industry.

It takes over at a time when Borgata’s dominance of New Jersey for online poker and gambling has been waning. The online casinos for Golden Nugget and Tropicana both outpaced Borgata in June.

However, Borgata is still the top grossing site when both poker and casino are considered.

It’s possible a shakeup is in store on the online gambling side of things with MGM in charge.

Racheal Grazias / Shutterstock.com

Proposed NJ Casino Expansion Raises Questions Of Favoritism Toward Caesars, MGM

With the NJ casino expansion bill likely to see a vote, some expansion objectors believe the bill unfairly favors casino operators like MGM and Caesars.

Both halves of the New Jersey Legislature, with a little help from Governor Chris Christie, recently agreed upon terms for a bill that would expand casinos to northern New Jersey. The final version of the casino expansion bill was written by the senate and now has amendments that stem from the assembly’s version.

Last Thursday, the bill passed a senate committee 9-2. Now the bill heads to the assembly where it must pass a committee there. If that works out, a super majority of three-fifths of the legislature as a whole must pass the bill, at which point it goes straight to the November 2016 ballot.

Currently, the bill says that two casino licenses will be made available in northern New Jersey. At first the licenses will only be made available to existing Atlantic City casinos. If an Atlantic City casino chooses to bid on one of the two licenses, it has 60 days to submit an application, and six months to formulate an investment plan of at least $1 billion. If no Atlantic City property submits an application, the licenses will be made available to any U.S casino operator.

Does the bill unfairly favor MGM and Caesars?

Opponents of the expansion bill have begun to speak out, claiming the bill is catering to big casino business and not towards the citizens of Atlantic City. One outspoken opponent of the bill is Jim Whelan, state senator and former Atlantic City mayor. Whelan has made statements voicing his suspicions about the expansion and questioning the fairness of the bill.

On January 7, Whelan spoke to the committee about his concerns and what he believes to be favoritism towards casino operators like MGM and Caesars:

“This is wired for MGM and Caesars; that’s where this is going. MGM hasn’t invested a hard nickel in Atlantic City of construction or operation — ever. They never have.”

MGM and Boyd Gaming Corporation are 50/50 owners of the Borgata, which is the most successful casino and largest employer in Atlantic City. However, one logical point Whelan made when speaking to the committee was about fairness of who is actually able to bid or apply for licenses.

Mohegan Sun, a tribal casino located in Connecticut, has spent a significant amount of money restoring Resorts AC.  However, despite tremendous investment in the property, Mohegan Sun is ineligible for the new licenses under the new bill because they own less than 50 percent of the casino.

Is the future for north NJ Casinos as bright as lawmakers hope?

Every New Jersey lawmaker is passionate about the outcome of the casino expansion, and even with an agreed upon bill there are still a lot of arguments about what end results it might produce. Many feel that expanding gambling to northern New Jersey will mark the end of Atlantic City.

Earlier this January, Moody’s Investor Service released a report with words of caution directed towards New Jersey lawmakers. The investment firm predicts the expansion will cause two to three more casino closures in Atlantic City.

Though most experts agree the expansion will ultimately hurt Atlantic City, many lawmakers simply do not feel that Atlantic City deserves to be bailed out. The city has a long history of fiscal irresponsibility, and new casino companies could potentially help revitalize New Jersey’s stagnant gambling industry.

New Jersey Senator Pete Barnes III made several harsh comments about Atlantic City’s irresponsibility at the committee meeting:

“Atlantic City, for 40 years, had a monopoly not just in New Jersey… but for the entire East Coast. Why didn’t Atlantic City put some money away during flush times?”

Is More Contraction In Atlantic City’s Future?

A new report suggests that Atlantic City could be impacted by casinos in neighboring states.

Atlantic City lost four casinos over the course of 2014. The closures cost the city thousands of jobs, and insured the Atlantic City casino industry would see revenue continue its downward trend in 2014 and 2015.

However, at the end of the day it wasn’t all bad news, as the casinos that survived the purge have seen individual revenues climb, and profits soar.

However, according to a recent report by Moody’s, the industry is about to undergo another challenge, as Moody’s analyst Peter Trombetta believes Atlantic City’s casino industry is likely to contract even further as more competition springs up in neighboring states.

“Increased competition will keep the heat on incumbents, and (we expect) that the number of casinos in Atlantic City will likely continue to shrink,” Trombetta opined in an interview with the Press of AC, pointing to the eight casinos being built in four border states at a total cost of $5 billion.

“It’s very unlikely someone is going to drive past one casino to go to another casino if they have similar offerings.” Trombetta told the Press of AC. “Offsetting that to a degree is Atlantic City is on the beach, so you still have that summer traffic going to the Jersey Shore…you’re not going to lose that customer.”

I think there is a lot more to it than this, and I’m of the opinion that the impact of the new casinos in surrounding states is being overstated, at least in terms of its overall impact on Atlantic City. I believe if another Atlantic City casino closes, it will be because their cake was already baked, and would have occurred with or without more competition.

Where is the new competition coming from?

As Moody’s notes, most of the new casinos being built are further away from Atlantic City than current casinos, so from a proximity point of view, there won’t be an impact.

Washington D.C.’s MGM National Harbor is an unlikely competitor, as are the casinos being erected in Massachusetts and New York. The distance is simply too great, although as Moody’s notes, it could cause existing casinos to focus marketing efforts in the direction of Atlantic City.

The only direct competitor for Atlantic City casinos seems to be the Live! Hotel and Casino in South Philadelphia, which is far closer than the other projects, and in reasonable driving distance from Atlantic City. However, SugarHouse Casino is already up and running in Philly, and other casinos, including the popular Sands Bethlehem are even closer to the New Jersey border. It seems pessimistic to believe there are many customers who would still travel to AC despite current options being much closer, but will stop making the trip when the Live! casino opens.

That being said, I do expect the novelty of the new casino to have a short-term impact. But, there are reasons these customers continue to go to Atlantic City, and will continue to go to Atlantic City.  

What Atlantic City has to offer

Moody’s lists only a single reason, Atlantic City’s beachfront location, that visitors may continue to travel to AC instead of closer casino properties. Again, I disagree. Whether its brand loyalty, familiarity, or having a longstanding relationship with their VIP host, anyone who is still travelling to Atlantic City now, will likely keep going, as the casinos under construction aren’t closer, or capable of offering something existing casinos already competing with Atlantic City do not.

Atlantic City, for all its warts, also has a “mini Vegas” feel to it (and does attract bachelor and bachelorette parties), as many of its casinos are in close proximity to one another, which allows visitors to casino hop on foot and visit different night clubs and restaurants, something that is simply not an option in Pennsylvania, Maryland, Connecticut, New York, or Massachusetts.

A potential monkey wrench

All this being said, if a casino (or perhaps even two) opens in northern New Jersey, it will likely lead to the closure of at least one, and perhaps two, Atlantic City casino properties. The difference is the state’s casino revenue will not be impacted, as the opening of a new New Jersey casino (which would almost certainly be a billion-dollar resort style casino) would more than offset the closure of the Trump Taj Mahal, or one of Caesars’ casinos. And any such casino, as has been proposed, would have higher tax rates than Atlantic City casinos — some of which would go towards bolstering Atlantic City.