A few weeks back I speculated that the two new casinos slated to open this summer will put several existing Atlantic City casinos in a precarious situation.
It appears that Caesars Entertainment shares those concerns.
During the company’s earnings call on Wednesday, Caesars revised its full-year EBITDA guidance down $40 million, citing the upcoming openings of Hard Rock Atlantic City and Ocean Resort Casino.
Since both casinos are expected to open in June, the company stated that the $40 million revision will be isolated to H2. Had the two new casinos opened in January, Caesars would have likely revised its guidance down by at least $80 million.
Why is Caesars so at risk?
Caesars has more exposure than other casino companies in the market for one simple reason. It operates three Atlantic City casino properties:
- Caesars Atlantic City
- Harrah’s Atlantic City
- Bally’s Atlantic City
If its estimates are accurate, that $40 million in H2 of 2018 is going to be a hard pill to swallow for Caesars.
The company’s three AC properties collectively tallied around $250 million in gross operating profit (the closest financial we have to EBITDA) over the entirety of 2017. That means Caesars is expecting the new casinos to cause them to take a hit of around 30 percent.
Zooming in on the gross operating profits of each individual casino, it’s abundantly clear that one of the three Caesars casino properties is in some serious trouble: Bally’s.
Gross operating profits 2017:
- Harrah’s AC: $116 million
- Caesars AC: $92 million
- Bally’s AC: $42 million
Making matters worse for Bally’s, when Ocean Resort Casino and Hard Rock AC open, Caesars Atlantic City and Bally’s are likely to take bigger hits than Harrah’s, which is located in the Marina and is the company’s flagship property in the market.
The $80 million cannibalization will likely breakdown somewhere along these lines:
- Bally’s: 50 percent ($40 million)
- Caesars: 40 percent ($32 million)
- Harrah’s: 10 percent ($8 million)
And those numbers could just as easily be:
- Bally’s: 60 percent ($48 million)
- Caesars: 30 percent ($24 million)
- Harrah’s: 10 percent ($8 million)
It’s pretty clear that the other two properties can weather the storm, whereas Bally’s would likely fall into the red.
If Caesars anticipates the two new casino properties will collectively cannibalize its properties to the tune of $80 million per year, Bally’s might not be long for the market.
Is it time for Caesars to consolidate its Atlantic City casinos?
There are a few options for Caesars to consolidate its AC assets into two or even one casino.
- It can try to stick it out with all three casinos, perhaps hoping that its EBITDA revision is overstated.
- It could close Bally’s, much like it closed the Showboat in 2014, and sell the property with a deed restriction that prevents it from re-opening as a casino.
- It could sell Bally’s to another casino operator.
- It could close or sell Bally’s and sell Caesars AC, putting all of its Atlantic City eggs in the Harrah’s basket.
