HIGH ROLLING ON THE RIVER
Michael D. Rose doesn't seem like a high roller: He's a 51-year-old Harvard Law School graduate. Nor does Promus Cos., the gaming and hotel company of which he is chief executive, seem like your typical casino operation: Its headquarters are in a restored Memphis mansion, far from the green baize and glitz of Vegas. Maybe that's why Rose is so eager to ride what he sees as a great shift in the gaming industry: Growth in casino gambling, Rose believes, will move away from the conventional confines of Las Vegas and Atlantic City and into the great American heartland as states increasingly allow limited gambling for the sake of added tax revenue. Best known for its Harrah's hotel-casinos, Promus plans to launch seven riverboats and other small dockside casinos in the coming year to serve communities in America's midsection (table). The first of these new regional casinos, Harrah's Northern Star, began operating on May 4 in Joliet, Ill.
Revenue from casino gambling nationwide surged almost 15% last year, to $10.8 billion, and Promus estimates it will top $12 billion this year. Analysts say riverboat and dockside casinos are poised for dramatic growth for the remainder of the decade. That's why Promus has already committed $267 million so far for riverboat projects and is prepared to hike its $877 million in long-term debt to fund further growth. Boasts Rose: "We're creating the first truly nationwide gaming brand name."
So far, Wall Street has been impressed. Promus stock has more than tripled in the past 12 months, to around 40 after a 2-for-1 split, or a stratospheric 60 times earnings. Morgan Stanley & Co. analyst Kurt A. Feuerman estimates earnings could rise 38% this year, to $72 million, as revenues climb 12%, to $1.2 billion. "It's a tremendously well-articulated strategy for regional gaming," he says.
'INHERENT INSTABILITY.' The odds aren't all in Rose's favor, though. While the gaming industry is booming, experts warn of an almost certain shakeout. With three more megacasino complexes opening soon in Las Vegas and with regional competitors multiplying, total U.S. casino-industry capacity could virtually double in the next 18 months. "Riverboats are a gold mine now, so there's a frenzy going on," says Raymond C. Avonsino Jr., president of Hilton Hotels Corp., which plans to open riverboat casinos in New Orleans and Kansas City. "But five years down the road, they won't all be profitable."
Rose is convinced that his brand-name strategy and strong management team position Promus to be among the winners. "They've done their homework, and they have an enviable reputation," agrees Saul F. Leonard, an influential industry consultant. "That should give them first crack at the better places as they open up."
Rose figures that most of the 35 states now operating lotteries eventually will allow some form of casino gambling. Besides the lure of added tax revenues, he believes state lawmakers will view casinos as a desirable amenity for major cities, not unlike racetracks or professional sports teams. Gaming experts agree that legalized gambling will spread--though they caution that the industry could face a political backlash. "There may be an inherent instability to the industry," says William R. Eadington, director of the Institute for Gambling & Commercial Gaming at the University of Nevada at Reno.
In addition, much of the 1992 industry growth came not in traditional casinos but in gaming on Indian reservations. That's why Promus is also testing the waters on reservations. Last December, it signed a tentative agreement with the Ak-Chin Indian Community to develop and manage an $18 million casino complex on its reservation outside Phoenix. And it bought 20% of a company that sells slot machines to reservation casinos.
Gambling hasn't always been the centerpiece at Rose's company. Formerly known as Holiday Corp., the company retired the Holiday name in 1990, when Rose sold its maturing Holiday Inn hotel chain to British brewer Bass PLC. Nowadays, gaming accounts for 80% of revenues and 79% of operating income, with hotels making up the rest.
While riverboats sound exotic, Rose believes they're a fairly conservative venture. In Illinois, which approved riverboat gaming in 1991, only 10 casino licenses will be issued, holding competition to a minimum. True, the state is imposing a stiff 20% tax on riverboat operators' net winnings, more than double the 8% to 9% average in Nevada. But with fewer rivals, promotional costs should be low.
Although Promus now operates casinos in the U.S. only, Rose has set his sights on international markets, too. Promus' bid to land a license for a small casino in Auckland, New Zealand, is a sort of test case to "show what we can do," says Promus President Philip G. Satre. It's also in the running for a casino that Ontario plans to open in Windsor, across the river from Detroit. Other contenders include Hilton, Circus Circus Enterprises, Bally, and Trump. And Promus is eyeing the European Community, depending on how rules for the single market develop.
ROOM SERVICE. Rose also is pushing hard to expand Promus' noncasino hotel chains. The company now operates 467 Hampton Inns, Embassy Suites, and Homewood Suites hotels. In the face of a nationwide hotel glut, Rose is banking on a value approach. Hampton Inns hotels, for instance, have no restaurants, and the price averages $40 a night, compared with $55 at midmarket chains such as Ramada and Best Western. As a result, average occupancy at Promus' chains was 71% in 1992, compared with the industry's 63%.
Still, Rose's main focus remains gaming. Despite the fear of overcapacity, other big players, including Circus Circus, ITT Sheraton, and Hilton are eyeing riverboats. Promus also has to deal with a crop of new, smaller contenders that are scrambling to take advantage of gambling markets. Casino America Inc., for example, launched its first riverboat last July.
Rose is betting that Promus has the savvy and strategy to ride through any industry shakeout. Maybe so. But investors ought to remember something every gambler should know: No winning streak lasts forever.Chuck Hawkins in Memphis, with Ronald Grover in Los Angeles