Trump: Why No Dice?

It's been another interesting week or so for investors in the gaming industry. Last Monday, Trump Entertainment Resorts (Nasdaq: TRMP) shares plunged nearly 17% to $10.49, after the company announced that it had completed its "current review of strategic options" without a deal, and added that no further discussions regarding a potential sale are taking place. Meanwhile, Hilton Hotels announced early last week that it had agreed to sell out to The Blackstone Group for $26 billion, or $47.50 per share.

Hilton shares, which subsequently popped 27% to $45 and change when trading resumed on Thursday, helped to pull up share prices of companies across the gaming industry. Shares of MGM Mirage (NYSE: MGM) and Motley Fool Hidden Gems selection Ameristar Casinos (Nasdaq: ASCA) both hit all-time highs. Melco PBL (Nasdaq: MPEL) shares rebounded 8% to $13.20, while other potential private equity targets such as Wynn Resorts (Nasdaq: WYNN) and Las Vegas Sands (NYSE: LVS) also posted decent gains.

The Hilton buyout closely follows the acquisition of diversified operator Penn National for $8.9 billion, in addition to private equity deals earlier this year involving Station Casinos and Harrah's Entertainment (NYSE: HET).

With all these skyrocketing share prices and hotel and casino buyouts, why can't Trump strike a deal? I can think of three pretty good answers:

The price
Any number of parties would be interested in Trump's three Atlantic City properties. But nobody wants to pay Trump's asking price for those assets -- not in their current outdated state, nor under these conditions.

Back in March -- when Trump first hinted at a sale -- the stock was hovering around $18. My guess is that the company was probably looking for $25, and now that the stock is down around $11, they'd be happy to get $18. They're probably not going to get that, either.

Anybody who acquires Trump will do so knowing that there's no quick fix for its problems: a lack of profitability, lagging competitive ability in a market that's in a short-term decline, and a heavy debt load (at around eight times EBITDA). Meanwhile, the cost of replacing Trump Plaza on the Boardwalk outright -- and probably Trump Marina as well -- will have to factor into the overall investment picture.

Pennsylvania
Problem No. 2 is the impact of the new slots in nearby Pennsylvania, which started coming online last November. Through the week ending June 3, four Pennsylvania racinos (a casino featuring both slots and a racetrack) have generated $342 million in gross gaming revenue in 2007. The effects on the Atlantic City market are already palpable: Through the first five months of 2007, slot revenue in the Atlantic City market fell 6.9% to $1.4 billion, dragging overall gaming revenues down 4.4% to $2 billion. This is just the beginning; Pennsylvania will eventually have 12 full-scale slot farms, with as many as 5,000 slots each, within the next few years.

Further complicating matters, the closing of Pinnacle's recently acquired Sands property has left Trump Plaza and Trump Marina dead last in terms of gaming revenue in the 11-casino market. Meanwhile, Trump Taj Mahal ranks fifth, behind MGM/Boyd's jointly owned Borgata and three Harrah's-owned properties. And in terms of overall gaming revenue, Trump's three properties were the third-, fourth-, and fifth-biggest percentage decliners this year through the end of May.

So when Trump says that there is room for EBITDA margin improvement by comparing its numbers with the rest of the Atlantic City market, I'd take that with a grain of salt. His company is also losing business faster than average.

Bader Field
The wild card in all of this is that Atlantic City may open up Bader Field and its 150 acres of prime real estate for casino development. Bader Field -- the world's first "air-port" -- closed last September, and it's set to be rezoned for new uses. Last month, the executive director of the Casino Reinvestment Development Authority told a state Senate panel that "we surely envision additional casino operations at this site."

The mere threat of this possibility devalues Trump's assets. Dan Lee and Pinnacle Entertainment spent $270 million to acquire the 18-acre Sands/Traymore site last September in order to tear it down to build a new hotel and casino along the Boardwalk. But why would another player go through the same process with Trump, if a bigger, possibly better, and certainly clearer piece of land were readily available?

Closing thoughts
In short, Trump Entertainment Resorts has no leverage. It's consistently unprofitable, and it sports a massive debt load. It also has a fifth-best property, and two others that are totally uncompetitive, in a market that will probably shrink over the next few years. While the company can dream up a replacement for Trump Plaza and/or Trump Marina, it still needs a way to finance it. Basically, unless it can find a buyer or otherwise partner up with somebody, the company could be in yet another death spiral back toward bankruptcy.

Intriguingly, though, Trump Entertainment isn't valueless. I'm bullish on Atlantic City over the long haul, and Trump Plaza in particular represents a prime piece of redevelopment real estate. While the new racinos in Pennsylvania and New York will curb much of the day-trip business to Atlantic City, I think we'll probably see a transformation along the lines of what's currently happening along the Mississippi Gulf Coast: a sizeable increase in the number and quality of hotel rooms, as well as a focus on convention business and non-gaming amenities. I'm guessing that Atlantic City will eventually become a truly viable destination, rather than just a conveniently close place to gamble.

For Trump Entertainment, the real trick will be surviving long enough to see it.