Boyd Bets the Pot in Atlantic City

Its new $1.1 billion luxury hotel and casino in New Jersey is the company's biggest wager by far. Is it a good deal for investors?

By Christopher Palmeri

In the casino industry's flash-and-cash world, Boyd Gaming (BYD ) has always been a small-time player. While such sharks as Park Place Entertainment (PPE ) and Harrah's (HET ) gobbled up the Las Vegas Strip and put down their markers from Reno to New Orleans, Boyd CEO William S. Boyd and his father, Samuel, placed little bets in places like Henderson, Nev., and Tunica, Miss. Now, Boyd is pulling up a chair at the high-stakes table: The Las Vegas-based company and partner MGM Mirage (MGG ) are wagering $1.1 billion that they can bring Vegas' glitz to downscale Atlantic City, N.J.

The two companies jointly own the new Borgata Hotel Casino & Spa, a 2,000-room extravaganza opening July 3 that will feature 11 restaurants, a first-class spa, and 135,000 square feet of gaming space, accented with an Italian palazzo feel. The play? That the Borgata can convert a market known mostly for day-tripping, dollar-a-slot players into a higher-end destination resort that will lure free-spending tourists from Boston to Houston. "I've looked at this for a number of years," Boyd says. "The timing was right."


  Analysts are putting the odds in Boyd's favor. Lawrence A. Klatzkin, a casino watcher at Jefferies & Co. figures the Borgata will generate $141 million in cash flow on revenues of $523 million in its first full year of operation. That would make it one of the country's top casinos.

Already Boyd Gaming's stock has been among the best performers in the industry, rising 18% this year, to about $17 a share. Klatzkin is telling his clients to stay in the game. "Everyone is going to want to see this new property," he says. "Revenues in July could be extreme." Earnings per share could jump from $1.09 this year to $1.41 next, Klatzkin figures, on revenues of about $1.3 billion. He's predicting three-year cash-flow growth of 48% per year.

While Boyd looks to be on a lucky streak, investors may want to hold off placing new bets. Casino openings have been historically dicey. The Venetian Hotel & Casino in Las Vegas had to put up star guest Sophia Loren at a different hotel on its opening night three years ago because the rooms weren't ready. "Virtually all the new properties underperform initial expectations," notes Marc Falcone, Deutsche Bank's casino analyst, who nonetheless has a long-term target of $20 per share on Boyd.


  Yet, the biggest losers in all this could be the Borgata's Atlantic City competition if the new property ends up just stealing their customers. Already, competitors Harrah's, Park Place, and Aztar Corp. (AZR ), parent of the Tropicana casinos have unveiled $600 million worth of projects to spruce up their properties. UBS casino analyst Robin Farley notes that in 1996, when Delaware introduced video-lottery terminals at racetracks and the Mohegan Sun Indian casino opened in Connecticut, Atlantic City operators launched a promotional price war that knocked their cash flow down 15%. It took five years for their profitability to recover to 1995 levels.

Also, on July 2, New Jersey Governor James E. McGreevey is expected to sign the state's new budget, which includes a series of new casino taxes that Farley figures will hit yearly earnings per share at Harrah's by 10 cents, Park Place by 5 cents, and MGM Mirage by 2 cents. She doesn't have estimates for Boyd or the other Atlantic City operators.

Donald Trump may be particularly vulnerable to Borgata. His Trump Hotels & Casino Resorts (DJT ) is groaning under the weight of $1.9 billion in debt, taken on largely to build Atlantic City's last new casino, the Trump Taj Mahal, in 1990. Trump's Marina Hotel Casino sits the closest to the Borgata, which is located about a mile from the city's famed boardwalk.


  No one would mistake Bill Boyd for The Donald. Boyd is a soft-spoken 71-year-old who looks more likely to hop off one of Atlantic City's ubiquitous casino buses than cruise into town in a limo. His father, Samuel, who passed away in 1993, worked his way up from card dealer to casino owner. After 15 years of practicing law, Bill joined Samuel in 1973. The pair built Sam's Town, one of the first casinos catering to the Las Vegas "locals" market.

They were also instrumental in keeping Vegas' fading downtown casinos alive, notes William N. Thompson, a professor at the University of Nevada, Las Vegas, who follows the gambling business. But with the Borgata, Boyd is taking a much bigger gamble -- for a potentially huge reward.

Palmeri is a correspondent in BusinessWeek's Los Angeles bureau

Edited by Douglas Harbrecht

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