California Gaming Plan May Help Vegas

The gaming sector was watching a big roulette wheel in the form of California last week, but there was a distinct difference of opinion over whether the casinos would hit the jackpot.

The Golden State paved the way last week for the number of American Indian slots to double to at least 43,000 Vegas-style slots, according to gaming analysts. The state's voters still have to approve the measure in March.

One bright spot is the potential for new high yield issues as tribes will need to finance their new facilities, one buy-sider said.

California gaming has long been an issue for Las Vegas, but it now is on the verge of becoming a much bigger force. Local politicians and casino operators in Las Vegas are worried about the new competition in California hurting their economy, as chronicled in the Las Vegas press. And some high yield investors certainly agree with that assessment

Portfolio manager Dick Cryan noted that in the short term, it likely will hurt Vegas because in the gaming world, customers inherently are drawn to something new. But in the long term, he conceded, it may even help Vegas because like the other smaller gaming areas that have sprouted up around the country in recent years, it could be a feeder market to the mecca of the gambling universe.

"People go to their casinos, and they learn now to gamble," he explained. "They say, I've been to the three casinos here, let's go to the Big Time.'"

Cryan noted that tribes could use junk bonds - as was the case in Connecticut with American Indian gaming - to finance their new casinos, although, he noted, it would have to be a big facility. The deal would almost assuredly be looking for a sizable equity portion, so it would have to be a project in the neighborhood of $400 million to $500 million to entice high yield investors, and that's a big casino, he said.

The one caveat in the argument that the new market would hurt Vegas, he said, was the fact that Vegas is a destination spot.

But even that was downplayed by gaming analyst Ray Cheeseman at Jefferies & Co. He said that even though Vegas is a popular destination, there are other markets that can be very lucrative.

"Yeah, yeah yeah, Las Vegas is a unique experience, but who wouldn't want a casino right next to L.A?" he said.

And Cheeseman noted that it could help the Vegas players by enabling them to form joint ventures with California that do not currently have access to capital or talented management.

There are more than 100 recognized tribes in California and nearly half of them could attempt bonafide casinos. And any one of them could be a partner for the Vegas players, he said.