At Itt, The House Takes A Hit On Baccarat

ITT's profits and stock get stung by some bad nights at Caesars

Baccarat has always had a certain mystique. Part of it comes from the movies: a tuxedo-clad James Bond nervelessly negotiating the high-stakes card game in an elegant Monte Carlo lounge. But most of the intrigue derives, simply, from the enormous sums of money involved. Says Jennifer Kim, who runs baccarat pits at Caesars Palace in Las Vegas: "Anyone just walking in off the street can bet up to $10,000 on a hand." For high rollers, it's not unheard of to win or lose $250,000 on a single bet.

So ITT Corp. lost a few. On Sept. 9, it signaled that third-quarter earnings would be flat from the pro forma $65 million earned in the year-earlier period, mostly because a run of very bad luck in August at its Caesars property turned the usual eight-figure monthly win at baccarat tables into a small loss. The next day, investors drove the hotelier's shares down 14%, to 48 1/4, their lowest price since January.

It's not the first time Caesars has taken a big hit. Two years ago, three Asian high rollers took Caesars for $10 million on baccarat over the course of a single weekend. Ordinarily, though, the baccarat tables are extraordinarily lucrative, with a house take typically between 18% to 20% of the money played. The take on blackjack averages 15%; for the slots, it's under 10%.

On the Las Vegas strip, casinos' baccarat winnings accounted for a sixth of their $3.6 billion in gambling revenues last year--the biggest dollar generator among table games. Those that attract the big-money crowd, among them Caesar's and ITT's other Vegas property, the Desert Inn, rely even more heavily on baccarat--and so are more vulnerable. From month to month, casino executives say, earnings move mostly in tandem with the baccarat take.

Baccarat (pronounced bah-ka-RAH) is a variant of chemin de fer, a French card game dating back to the 15th century. In the modern version, cards are dealt from a wooden "shoe" containing eight decks. Players bet on one of two hands, each dealt up to three cards. The winning hand is the one with a value--determined by arcane rules--closest to nine. It's almost pure luck: Players decide only what hand to bet on, and how much to bet. Winning bets pay even money, though the house takes 5% of proceeds from winning bets on the banker hand.

NEW LURE. ITT also said that earnings would be off because of disruptions caused by construction at both Desert Inn and Caesars. The activity will add a 1,250 room tower behind Caesars by mid-1998, and create new shopping and entertainment areas to lure more walk-in traffic. For now, though, it's just driving business away. The amount wagered at both properties is slightly off, limiting casinos' ability to diversify away the risk of a few players walking off with big winnings. "When you operate large baccarat games, the idea is to keep the volume up, to smooth out the periodic distortions," says Saul F. Leonard, an independent gaming consultant in Los Angeles.

Does Wall Street adequately account for the risks of such a high-stakes trade? The buy side said no on Sept. 10, and institutions dumped ITT stock. The sell side isn't so sure. "It's bad luck, something the street and the company can't predict," shrugs Harry Curtis, an analyst at Smith Barney Inc. But ITT can mitigate it. The new construction at Caesars is creating space for more slots, to bring in more predictable, if lower-rent, gamblers. And next door to the Desert Inn, ITT will build a Planet Hollywood hotel and casino aimed strictly at the hoi polloi. Chances are there won't be a baccarat lounge.

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