HARRAH'S FUTURE IS ANYONE'S GUESS
Published: Sunday, June 18, 1995
Series: A HOUSE OF CARDS?
THE GAMBLING BUSINESS IN NEW ORLEANS IS A MESS
Byline: By JEFFREY MEITRODT and MIKE HUGHLETT Business writers
When Harrah's officials met with 22 of the city's public relations experts last week, they planned to talk about the brilliant future of their gambling emporium in New Orleans. Then crisis veteran Jeanne Nathan rose to offer some advice.
Don't worry, Nathan reassured Harrah's officials. The 1984 Worlds Fair, where she worked, was an unmitigated financial disaster, but it ended up being good for the city.
For Harrah's officials, being mentioned in the same breath as the world's fair boondoggle is not what they had in mind when they decided to build a $815 million gambling palace at the foot of Canal Street.
But after two sudden riverboat closures, the layoff of 1,500 casino workers and an unexpectedly weak opening month at Harrah's Casino New Orleans, Harrah's official Bob Dowd concedes the world's fair comparisons aren't all that surprising.
Few think the situation with gambling is that dire yet. But neither the casino bosses, nor Wall Street analysts, seem to know just how bad things could get.
The only thing the experts seem to agree on is that the permanent facility will, in fact, be built. Moreover, they say the Canal Street casino should eventually be successful, even if the temporary casino flops.
Results for Harrah's Casino New Orleans' inaugural month came out with a whimper Monday. The casino took in just $11.2 million, one third of what it had been forecasted to take in on average per month, and less than half of what many stock analysts were predicting.
The May 8 flood, which closed the casino for three days, was partly to blame. But company executives admit the biggest culprit was simply poor turnout. To bolster results, the company is sharpening its marketing and tinkering with the games. How successful will it be? There are basically four scenarios.
*** BEST CASE SCENARIO ***
No analysts are talking seriously about this. But Harrah's hasn't backed off from its pre-opening projections, which called for the temporary casino on Basin Street to take in $395 million in annual revenue, or $33 million per month.
"At some point in the future, we'll have to make disclosures if we believe our existing forecasts will not be met," said Ron Lenczycki, Harrah's New Orleans' president "It's too early to speculate."
Still, Lenczycki acknowledges the gambling industry's start-up problems in New Orleans, especially the closing of the two-boat River City complex, give rise to questions.
"I'd feel better if the boats were all doing well," he said. "But on the flipside, I'm not panicking. It's absolutely premature."
In fact, some casino analysts believe the near collapse at River City bodes well for Harrah's since it means less competition. The immediate boost, analysts say, could be as much as another $5 million in monthly revenue for the Basin Street casino. And in the long run, some experts say, Harrah's could wind up with the only game in downtown New Orleans.
"I think it's entirely plausible that within a year or so, there will be no riverboats left downtown," said Nap Overton, gambling analyst with Morgan Keegan & Co. in Memphis. "The land-based casino may prove too formidable for any competing riverboat to do well."
*** MAKING THEIR NUT ***
Even if the temporary casino doesn't do as well as Harrah's once hoped, the Basin Street facility could generate enough cash to keep the project out of trouble.
The main priority is producing the $72 million budgeted for construction of the Canal Street casino. Harrah's assumed that with $395 million in revenues, the Basin Street casino would throw off at least $72 million in cash. By reducing costs, the casino could still produce the magic $72 million, even if it falls well short of the original revenue target.
"It will be extremely close," said David Anders, an analyst at Raymond James in Tampa. "Harrah's will have to focus on the expense side of the equation."
The casino's biggest variable cost - the type of expense it can reduce - is labor. But labor costs can be chopped without laying people off, and Harrah's is "not thinking about layoffs at this point in time," said John Mayewski, Harrah's New Orleans chief financial officer.
The company won't disclose exactly how much revenue it needs to generate the $72 million in cash. But gambling analyst Jason Ader of Smith Barney estimates the temporary casino would have to haul in around $300 million, or $25 million per month, to meet the goal.
Prior to the opening, most analysts didn't think that would be a problem. And some remain confident the temporary casino will haul in around $250 million in its first year.
"I think they'll do at least $20 million a month for the first year, and that is a very bad-case scenario," Overton said.
*** Breaking even ***
A more unpleasant scenario is if the Basin Street casino generates just $16.7 million per month, or $200 million for the year - the facility's approximate break-even point, according to Harrah's Mayewski.
That's not unimaginable. In fact, two analysts predict the property will bring in less than $200 million in the next year.
That could create big problems. While breaking even is hardly the worst thing that could happen to a business, it would result in a $72 million construction shortfall for Harrah's.
Making up that shortfall gets tricky. The project can cover up to $17 million in construction costs by drawing down on its bank lines of credit. Anything more than that, however, comes out of the partners' pockets.
Analysts say that wouldn't be a problem for Harrah's, a $1.7-billion asset company that had $84 million in cash at the end of 1994. But they said it might cause headaches for the other two partners, Christopher Hemmeter - whose own real estate company said last week he may be a bad credit risk - and a group of nine New Orleans businessmen known as Jazzville.
Any partner who doesn't contribute its share to a construction shortfall would lose a portion of its ownership stake. For example, if Harrah's came through with the entire $72 million, its ownership would rise to about 64 percent, an analysis of the documents shows.
Currently, Harrah's parent company, Promus Companies, owns 53 percent of the project, while Hemmeter has a one-third interest. The Jazzville group owns 14 percent, but can increase its stake to 28 percent if it comes up with another $33 million by Sept. 1. If Jazzville exercises that option, Harrah's interest would fall to 38 percent.
It's not clear if Jazzville will ante up. Casino financing seems to be getting tighter, and the prospects for gaming in New Orleans are looking dimmer.
"I think the initial results will make (the Jazzville investors) less eager to invest," analyst Overton said.
Jazzville investor Wendell Gauthier declined to comment. "That is pure speculation," he said.
*** Worst case scenario ***
So what if the worst happens? What if the temporary casino generates less than $200 million in annual revenues?
Ader, the Smith Barney analyst, predicts the Basin Street facility will bring in no more than $150 million in its first year, down $200 million from his initial forecast. A bond analyst, who asked not to be identified, predicted the temporary casino will gross a maximum of $180 million in its first 12 months.
"I'd feel a lot more comfortable with Promus if they had never gotten involved in New Orleans," Ader said.
The only way Harrah's can salvage the situation, Ader said, is if it is able to lower its tax rates and convince the state to allow it to build a hotel and restaurants at the Canal Street casino.
"If they aren't able to do that, it's going to be a real risky predicament," Ader said. "I'd rather not see them risk the capital and the exposure."
It's too late, however, for the company to back out, even if it wanted to: Harrah's has guaranteed bondholders it will build the casino. What's more, the company maintains it still wants to go forward.
"We still believe the New Orleans market will produce the kind of revenues we've been talking about all along," which is about $600 million annually at the Canal Street casino, Lenczycki said.
A House of Cards?
The gambling business in New Orleans is a mess. Two riverboat casinos at the River City complex are idle. Nearly 3,000 people have lost their jobs in the past three months. Harrah's temporary land casino did one-third of its projected business in May. What's going on? When the Star riverboat casino brought big-time gambling to New Orleans in 1993, experts predicted an economic renaissance.Twenty months later, the Star is long gone, and the renaissance is starting to look like the boom-and-bust days of old. Today, The Times-Picayune examines how we arrived at this precarious crossroads, and what might lie ahead.
Illustration: STAFF PHOTO ILLUSTRATION BY KENNETH HARRISON AND ELLIS LUCIA<
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