"There's two times of year for me. Football season and waiting for football season." - Darius Rucker
At next January's annual NFL meeting, owners will vote on whether to raise their arms in a touchdown signal indicating that Las Vegas has scored. The town needs 24 of 32 owners to agree to move the Oakland Raiders franchise there. In my early misspent youth, I worked for the New York Jets hustling press releases to a largely indifferent press corps at the time. As a result of that brief association, I developed contacts on NFL teams who I can still call on for an educated, inside, no-BS opinion on the owners' sentiment on the issue. The consensus was that, yes, lots of owners lean toward approval, but one never knows. "Some of these guys exercise greater influence than others," said one source. "There are owners who will oppose the move on all kinds of grounds, others who will support it as making sense because the economics work. The NFL is about two things only: protecting the shield and growing the bankroll. Everything else is a shrug."
I asked if there were still those with the old moral objections to anything that associates sports with gambling. "There are some, hard to say how that will play out. Right now these guys are more worried about lagging TV ratings, not much else. They've blamed the sharp decline of viewership for games mostly on the election cycle. Yet there is still growing concern that viewership among millennials is diving. After the election, if they still see ratings moving south and their golden goose threatened with constipation, the odds on approval get better."
Another source told us, "They see the writing on the wall writ large about millennials. The younger demos don't watching the games in the same relative percentages as their fathers. They have less patience to sit through four hours watching every play polluted by constant promos and ads. Fantasy Daily Fantasy games is another thing. You don't need to watch the games to play, just tote up afterward. But let's face it, fantasy sports is gambling. And gambling has been the engine of the NFL since day one-though the owners will never admit that. Believe me, crowds you see at the Vegas sports books aren't there for the buffet."
The next phase in the inevitable evolution of Las Vegas
On June 16, we wrote an article about the prospects for Las Vegas acquiring an NHL franchise. We supported the idea in general as representing part of the evolution of the town as a host city for at least one of the four major sports. Of them, NHL hockey is the weakest, but it seemed a start. The goose with the 24-karat golden eggs is really the NFL. Now that prospect has edged closer to reality, as last week Nevada legislators approved a plan to raise $750 million in public money toward the development of a $1.9 billion, 65,000-seat stadium to become the home of the present Oakland Raiders.
Some industry uncertainty lingers about the arrival of all major pro sports into Las Vegas as prospective positive contributors to gaming industry revenues. A chief issue is displacement of potential gaming and non-gaming dollars to those eight Sunday home games. From tailgating to the post-game traffic, we could be looking at six hours when tens of thousands of Strip and locals properties patrons would be absent at gaming tables or slots, nor dining at the buffet or gourmet rooms, nor shopping at casino malls. And after a long day, will players still be inclined to attend a show in the evening? Bottom line: Would money spent on the Las Vegas Raiders games add to, or merely displace, casino revenues citywide? And if so, how might that impact the shares of public gaming companies there?
Quick math: Let's take an average gaming budget of $575* for a tourist arriving either by plane or by a 5-hour drive from Southern California. Add another $520 budget* for room, food, beverage and shopping and that couple is worth a theoretical $1,000 to a strip property before comps. Take six prime Sunday hours off that number and lose at least lunch for two and/or pre-game brunch exchanged for the same thing at the arena at clearly outrageous prices. Add the lost gaming revenue potential of those six hours and we estimate a total loss of $250 to $300 in revenue to the casino hosting them. Reduce that cash revenue left by another $100 in comp points used accrued from previous trips and you have a total diversion possible of $350 to $400, or up to 40% of the potential spend.
Multiply $400 by say 1,000 persons (500 rooms) tied to a game package and expect $400,000 in diverted revenue X eight games or $3.2 million. Furthermore, the industry won't know until after the first season, just how many customers skipped trips entirely to accrue Vegas budget money to pay for their game tickets, which now average over $100 each, or $200 a pair plus spend at the arena for food, drink and merchandise and you get somewhere around $400 to attend a single game-not including kids.*
In theory, the entire $400 cost of the game is diverted from the host casino. At this point, we can only assume that the casino ticket blocks will be allocated to the properties based on similar principals long applied to Vegas fights and entertainment events where casinos request ticket blocks based on what they anticipate will be demand. And those tickets will be allocated to customers in a similar ranking as other comps, from entirely comped to half price to full boat, depending on patron worth. How the industry will figure out who gets what seats located where has the makings of a full-scale war since Las Vega Sands Chairman Sheldon Adelson is already on board as the chief private sector financier of the project having pledged $750 million to the project.
Guess who's getting the prime seats?
So, the debut of the NFL in Vegas can end up simply diverting more dollars than it creates for the town and being totally non-accretive to revenue or earnings for the casino operators. We said can, not will. There is also the issue of ticket block allocations to casinos. Will they divide up a pool of season tickets and use them as database rewards to players? If so, how do the companies avoid a bloodbath on who gets how many? Or will the team merely offer game packages to the casinos on a first come first served basis? So this entire initiative is no slam-dunk it may appear on the surface.
Game packages will naturally be linked to team away games. So A Raiders/Chiefs game, for example, an away contest for KC fans becomes a weekend package for every casino customer in the KC marketing area. This would apply to the entire home schedule and become a potent marketing tool in the markets where Raider games visitors play. You can be sure the databases will be massaged to death on these packages. It likewise presents a premier marketing tool to cull high roller business with VIP game weekends.
So, is this just a civic pride project disguised as an economic boom?
An NFL team clearly is warranted economically. Las Vegas remains the single large metro area in the U.S. without a pro sports team. From a general perspective the town has the population, the economics and the vibes necessary to assure the success of any professional sports team. Its long past its days as the mischievous juvenile delinquent of U.S. cities. It is a diverse, bustling metro area that can support an NFL team.
But as the town reaches each watershed, its signature raison 'd etre --i.e., gaming shrinks -- relative to its economic base. Ever more investment in arenas, entertainment and convention centers and now a possible NFL/UNLV stadium bears both a positive and negative charge. The city is now grown up and gaming is moving from its role as its daddy to one of its many diverse children. What are the implications of a Vegas where gaming now has shrunken to 35% of all casino revenue going forward?
There is a silver lining -- and it could be a big one.
On the other hand would this move bring a silver lining to the town's casino industry? It well could. It depends how much and who for. And if you happen to own or consider owning the stocks of the companies affected, what can you expect to see in terms of a bottom line contribution to ever growing earnings?
Take a peek at the Raiders 2015 schedule as an example: Kansas City, Denver, Texas, Carolina, Buffalo, Pittsburgh, Green Bay, Tennessee, Seattle, Baltimore, and Arizona. Now project the marketing value to a Las Vegas casino packaging game tickets with rooms and dining deals and targeting fans in these markets at every gaming level, from high rollers to all cash players and blend that with extra sports books business. There is no denying it's a great marketing tool available to casinos. Nor will there be any question that the marketing power of the team's season ticket holder data base will wield a mighty potential for cross promotion.
So the question is: Who will be the biggest beneficiaries, and by extension get the most revenue accretive to earnings during the fall/winter quarters of the NFL season? If the Raiders or their opponents for the eight home games are in the mix for the playoffs, the animal spirits of every segment from big time football bettors to everyday die-hard fandom will be released and the revenue harvest of this crop -- even with displacement factored in --could be immense. Present estimates say that the proposed dome would open in time for the 2020 NFL season, when it would be hoped that the Raiders would field a competitive team.
Holders of certain gaming shares heavy in the Vegas sector will see earnings spikes for two reasons. One because in a sense the eight home games of the proposed team becomes the equivalent of eight mini-super bowls. They will be far more potent than the booking of an A-list entertainment act. A better analogy would be a big fight eight times a year with a marketing target pre-selected and focused on the fan base of a particular city.
The Tote Board: NFL Bonanza or Bust or "Meh" for Casino Stocks Now and Later
1. The vote. The NFL owners meeting next January is the key here. The Davis family, which owns the Raiders, is all in on the move. The present economics of its Oakland market will make their case. If their colleagues agree we see that as a trigger point for the shares of companies we believe to be the biggest potential winners. It would not surprise us if their shares moved on the news. Yet I don't see much of a downside if the vote goes against Vegas because the news will break at a time when the convention bureau publishes its annual visitation estimates and we expect those to be positive.
2. Publication of a ticket allocation plan. This could come as early as spring/summer 2017. As should be apparent it's going to take Solomonic wisdom to come up with a paradigm that all properties can swallow as being fair. Our guess is that it will follow a similar pattern to those of a big fight except that no single property will be the "host" venue and therefore control the prime ticket blocks. It may rotate it may be assigned by a formula of total rooms or in the spirit of total free enterprise simply take the same route as if the Raiders were still in Oakland: money talks.
Such an allocation would assign blocks as follows:
1. Metro area Vegas fans get to purchase season ticket according to their own budgets.
2. X number of tickets put on public sale.
3. X commitment by each property for a block of tickets realistically built off its own marketing research. What they don't want to do is commit in advance to a blanket buy. What happens in this instance is all too often instead of customers chasing tickets, tickets chase customers. In this tricky area the standard approach to fight tickets which is better, would rule: Casino marketing will tap its visitor team city database, create a package and promote. Based on response there as well as the top tier premium player lists, I would put in its order for tickets by game.
The biggest Winners With Best Potential Earnings Impact
We see three:
1. MGM Resorts International (NYSE:MGM); price at writing: $25.75
Our outlook: Positive with two of its three pipeline projects plus dominant position on the Las Vegas strip and their Macau property scheduled to open next year presumably when that market's stabilized GGR situation works in their favor.
NFL impact: With over 40,000 rooms on the strip, MGM will be in a similar position it has in its big fights -- except it won't have as much control over ticket blocks or locations for games. Yet common sense dictates that the eight home games targeted first at away team cities will be a phenomenal market tool for the company because they can house so many fans. And the old adage in gaming is that you usually play where you stay -- at least the bulk of your play.
Bear in mind the seating capacity of the projected Dome stadium will be 65,000. MGM has the capacity to house thousands of football fans for a game weekend without impairing its normal flow of business. They are also big enough to absorb any impact from revenue displacement.
Our call: If you don't own MGM, it's a buy signal on the NFL news.
2. Las Vegas Sands, Inc. (NYSE:LVS); price at writing: $57.73
As once of the three principal financiers of the dome stadium, LVS will sit at the head of the table. It sees itself as a good citizen of the town so CEO Adelson will take a statesman-like approach to seat allocation. (The other two are the State and the Raiders.) The company controls over 7,000 rooms on the strip. For them the dome significantly enhances their MICE (meetings, incentives, conventions, expos) marketing profile in which they excel.
Furthermore, even with a smaller seat allocation they can better target higher end business. For them it's a no-lose situation. We assume they will have a central position in the bond issue as well.
Our call: There are already lots of positive metrics to support and upside on LVS without the stadium. We've put a $70 target on the stock by Q2 of next year. We think that if the NFL deal gets done we will see a move on LVS stock if the January owner's vote is positive and the Macau stabilization continues.
3. Caesars Entertainment (NASDAQ:CZR); price at writing: $7.50
The company as we now know it is dragging itself toward the finish line of its Chapter 11 filing in January 2015 after an ugly, protracted struggle with its junior debt holders. As part of the final deal, those holders will control most of the equity in the successor company. They will also vote in January on management's restructuring plan, the centerpiece of which is the split of the company into an operating company and a REIT. It's too early to tell whether this will be the newco that will emerge. A new board will decide among other things, whether to dump all the company's realty into the REIT, withhold some, or begin selling off many of its legacy properties to further build up what is already expected to be a flush cash position.
For our purposes here, we think Caesars, should it not offload legacy properties, will be another prime beneficiary in the NFL deal. The present Caesars and its erector set subsidiaries control nearly 19,000 rooms on the Las Vegas Strip. Their immense Total Rewards database outside of Vegas touches nearly every market that a Raiders team would play. The deal would present a gift from the gods for a newco because no other Vegas operator has anything near the regional presence of CZR brands. And that means the eight home games of the Raiders could be powerfully marketed to the Total Rewards database that would translate to lots of accretive revenue to its strip properties.
Our call: Wait. Until the structure of the newco is clearer its hard to determine at this point whether CZR will hold all its Strip properties. This much we do know. The newco will emerge with lots of cash, a new management team tightly focused on cost controls and upgrading of its legacy portfolio. Until the newco shares are priced for CZR's current equity owners, it's a hold.
In that the NFL deal would create a projected 12,000 jobs, which in turn contributes to the economic health of the metro area, the NFL has positives for locals casinos. Our concern, however, lies in the displacement factors already laid out. We think revenue displacement on Sundays, when so many Las Vegas residents visit their favorite casinos could have a negative impact on revenue across the board and, by extension, possibly impact earnings during the football season. That's why, in spite of liking the stocks of some local operators like Boyd Gaming (NYSE:BYD), for example, we're less enthusiastic about its NFL deal benefits. It's a heavy locals casino stock yet it has regional properties that would benefit from game packages.
At present, we assume that the state's approved commitment to $750 million toward the construction and development of the dome will end up as a bond issue. Depending on the coupon we think the cash flow potential of the dome housing both the Raiders as well as the home games of the University of Las Vegas football team presents an interesting buy for municipal or state bond buyers.
There should be much institutional interest in the bonds if the coupon is attractive enough by the time of issuance. This is a development worth investor attention as it unfolds.
*Sources: NFL Average Fan Cost Index, UNLV Research, LVCA statistical base.
About the author: Howard Jay Klein is a 25-year C-level executive of the casino industry and now a consultant to that sector. He is the publisher of the SA marketplace site The House Edge. His own gaming portfolio is held in a blind trust to avoid potential conflicts of interest with clients past, present and future.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.