Casino Megadeals Face Arduous Antitrust Screens: The Mirage-Mandalay and Harrah’s-Caesars transactions are seen reaching the finish line after sell-offs

Gambling industry experts are betting that the two largest deals in the history of the sector will reach completion sometime in 2005 – but only after the combining companies sell off some casino-hotel properties to assuage federal and state competition regulators. Some authorities, in fact, believe that divestiture efforts already are underway to speed up the screening process, which could take as a long as a year. This scenario is a rarity for the gaming industry. Antitrust and state monitors seldom faced casino-hotel deals that raised issues of competition, concentration, market share, or market power. But the back-to-back mega-agreements announced in July – MGM Mirage’s $7.9 billion acquisition of Mandalay Resort Group Inc. and Harrah’s Entertainment Inc.’s purchase of Caesars Entertainment Inc. for $5.2 billion – were watersheds not only in size but in how they thrust competition questions into the forefront for regulatory purposes. The MGM-Mandalay union would give the combined company a hefty share of hotel and gaming business on the famed Las Vegas strip, and the merged Harrah’s and Caesars five of the 12 licensed hotel-casinos in the eastern gambling venue of Atlantic City, N.J. But it isn’t that simple. As in most heavily scrutinized mergers, federal antitrust regulators will base decisions on their definitions of the market, which they have little experience with as far as gaming is concerned. Moreover, experts say, there could be an infinite number of ways to slice and dice features of the business – beyond just the geographical confines of the two gambling strongholds – in hammering out the market’s configuration. Ultimately, the definitions may transcend gambling and be applied to other industries, although there is no guarantee of that. Once the two FTC teams working the deals reach decisions, casino regulators in Nevada and New Jersey will take over and they may not be bound by the feds’ market definitions. The New Jersey Casino Control Commission, for instance, packs the power to check “undue economic concentration” from a deal. For example, a key issue that the FTC teams will look at is competitive pressures on both gambling centers from operations in neighboring states. Marvin Roffman, a veteran gaming analyst at Roffman Miller Associates in Philadelphia, notes that both venues are being hammered on their flanks. Indian reservation casinos in California are headed toward a $4 billion-a-year business, he says. In the East, Connecticut reservations are logging $2 billion in revenues while Pennsylvania recently approved installation of 61,000 slot machines in the Keystone State. “One third of the market in Atlantic City comes in from Philadelphia, and Pennsylvania is going to get 61,000 slots,” he says. “Slots account for 75% of the revenues in Atlantic City. So you are talking about serious competition in a neighboring state.” Nevertheless, Roffman says that the concentrations in Atlantic City itself cannot be ignored; the combined Harrah’s and Caesars would have accounted for 48% of revenues in the first half of 2004 and “a higher percentage of earnings.” “Is 50% concentration of the market? You bet it is,” he says. Thus, the FTC pros, who like to define markets as narrowly as possible, could enlarge the relevant areas to include neighboring territories, such as the entire Northeast, in weighing the Atlantic City impact. Or they could reach for any number of channels. “How do you measure market shares?” asks Steven Newborn, an antitrust lawyer at Weil Gotshal & Manges and a former FTC merger regulator. “Do you measure by it by hotel rooms? Do you measure it by hotel revenues? Do you measure it by casino revenues? Do you measure it by slot machines? The possibilities are pretty numerous and it’s not clear how they are going to measure it. My guess is they will pick two things – hotel rooms and revenues and casino revenues,” he states. Charles E. Biggio, another former federal merger regulator who is now a Partner in the New York office of Akin Gump Strauss Hauer & Feld, says that the market could even wind up being defined by a host of other characteristics, including entertainment, leisure, vacations, and resorts, just to cite a few. He notes that many visitors go to Las Vegas for a variety of reasons that may or may not include gambling. “You may go to Vegas just to go to Vegas,” Biggio says. “I can see an argument that says Vegas is unique, but people go to Vegas for all kinds of reasons, and there are a lot of hotels in Vegas. So even in Vegas it is not clear that there’s a slam dunk that there’s a (competition) problem.” Biggio says that the FTC also faces a problem in determining where pricing power exists to define whatever market emerges. “I don’t know from the outside looking in what the government is going to focus on. Will it be hotel rooms? Or gambling odds? It’s a difficult thing to figure out.” While not foreclosing any potential outcomes, Newborn calls attention to the government’s preference for defining the market as narrowly as possible in determining market power. With the government taking that side and the merging companies probably pushing for a broader definition to dilute any possible concentration, he says that the mind-boggling review might revert to a focus on Atlantic City and Las Vegas as the relevant markets. “The question is what the narrowest possible market is so that if you increase your price 5%, the price increase would stick because there aren’t enough people to discourage you,” he says. “It’s a hard test to break out of. I would say it’s harder to argue that the market is broader than the individual areas we’re talking about. A 5% increase will not drive people away.” Copyright 2004 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com