Las Vegas Business Press :: News : Morgan Stanley makes push into Atlantic City

Morgan Stanley makes push into Atlantic City

Investment house buys 20 acres for $1B casino near Trump's Taj

BY DAVID MCKEE
BUSINESS PRESS

Although casinos have been a favored vehicle for investment banks for more than a decade, Morgan Stanley is upping the ante and taking the middleman out of the equation. Its subsidiary, Morgan Gaming Cos. Holdings, has bought 20 acres of Boardwalk real estate in Atlantic City, with the intent of building a casino.

The land, which costs $74 million, is within Atlantic City's casino zone, according to Joe Weinert, managing editor of "Michael Pollock's Gaming Industry Observer." Morgan Stanley hasn't applied to the New Jersey Casino Control Commission for licensing so far, although NJCCC spokesman Dan Heneghan says the banking house has opened some getting-to-know-you talks with Garden State regulators.

According to a Business Press source, Morgan Stanley's development partner will be Rank PLC, owner of the Hard Rock brand. Weinert confirms that local speculation has centered on the English company.

Once a savior of Donald Trump, Morgan Stanley will go head-to-head in Atlantic City.

"It remains to be seen if Morgan Stanley would own this property outright," Weinert continued, noting that financial institutions typically avoid gaming-licensing procedures like the plague, as they tend to be cumbersome and time-consuming. "The city would like to see (land) put on the tax rolls and made a lot more attractive," he added, describing its current occupants as "weeds, rocks, dirt ... broken glass."

"They're very bullish on Atlantic City," former Trump Entertainment CEO Scott Butera said of Morgan Stanley. "That's why they made an investment in Trump." But Dan Ahrens, manager of The Gaming and Casino Fund, a gambling-intensive mutual fund, looks at it differently. "I assume they're looking at it as a valuable investment that happens to be in gaming," he mused.

Morgan Stanley, which rescued Donald Trump's casino company, Trump Entertainment Resorts, from bankruptcy, will now be muscling in on Trump's turf. It intends to build a $1 billion casino resort adjacent to the Showboat (owned by Harrah's Entertainment) and just a block north of Trump Taj Mahal.

'POSITIVE MOVE'

Butera, now ensconced in Vegas as president of Brett Torino's Metroflag Management, doesn't think his former company has anything to worry about. "Anybody with capital that's looking to invest in the gaming business is positive for us," the ex-Trump exec opined. "They're a very bright, young, energetic team (at Morgan Stanley) that likes the business and likes Atlantic City, which is good."

Butera also contended that we might be seeing the leading edge of a trend in the banking business. "Gaming investments are still at a discount to other investments in real estate," even when casino stocks are trading at a historical premium, he explained. "This is not a one-shot deal. You'll see more investment from the money houses into the (gaming) sector." He cited Columbia Sussex, new owner of Aztar Corp., as an example of a real estate investor that got excited about Atlantic City and Las Vegas, and was willing to carry that passion through to a major acquisition.

This would not be Rank's first foray into Atlantic City, either. In 1997, a planned infusion of Rank capital into Trump's Castle was aborted literally on the eve of the formal announcement. Trump's Castle was rebranded the following year and now operates as Trump Marina Hotel & Casino.

Trump was more receptive to Morgan Stanley's embrace, receiving a $500 million line of credit from the investment house in May 2005. In return, Morgan Stanley secured a 15 percent stake in Trump Entertainment. It is also listed as a participant in TrumpStreet Casino & Entertainment Complex, proposed for Philadelphia. Should Trump Entertainment fail, Morgan Stanley is now first in line to seize the company's hotels.

The Morgan Stanley deal was evidently more to Trump's liking than a Credit Suisse bailout that collapsed in September 2004. That arrangement would refinance Trump Entertainment debt, including a $400 million injection of cash, in return for two-thirds ownership. Trump would have personally retained 25 percent of the company and was obligated to chip $71 million into the recapitalization. He also would have been obliged to surrender the title of CEO.

According to Butera, that proposed demotion wasn't the straw that broke Credit Suisse's back. "Each deal was very similar, so it wasn't about (Trump stepping down). He's a very positive asset for that company. The investors see that." Indeed, Morgan Stanley now has control over the deployment of Trump's personage in the marketing of his casinos.

THE DONALD'S IN CONTROL

While the Morgan Stanley pact reduces Trump's own stake in the company from 56 percent to 27 percent, the erstwhile majority owner gets to hold onto the roles of both CEO and chairman of the Trump Entertainment board. The accord drew a less-than-rave review from one gaming analyst. Barbara J. Cappaert, of Montpelier, Vt.-based KDP Investment Advisors, deemed the Morgan Stanley bailout less appealing that Credit Suisse's, opining that Morgan Stanley obtained insufficient equity and that The Donald retained too much control.

In addition to rescuing Trump, Morgan Stanley is putting $300 million into another aspiring Pennsylvania casino project: Crossroads Gaming Resort & Spa, planned for a site slightly northeast of the Gettysburg battlefield. Las Vegas-based Millennium Gaming, owner of the Cannery Casino & Hotel in North Las Vegas, is leading the charge for Crossroads.

Morgan Stanley is also among the prestigious firms that have gone all in on Internet gambling. Both it and Goldman Sachs are shareholders in BetOnSports.com. Goldman Sachs, Fidelity and Merrill Lynch are all participants in SportingBet.com. They're no strangers to the brick-and-mortar-casino demimonde, either. Weinert pointed out that Merrill Lynch used to have a stake in Atlantic City's Sands Hotel Casino but cashed out after Carl Icahn won a battle for control of the underperforming property.

What makes Morgan Stanley's Atlantic City play unusual, Weinert concluded, is that "a financial institution has taken the initiative to develop this project," for which precedents are few and far between. Heneghan agrees. "I'm unaware of any other time when an investment (firm) has made this kind of investment."

dmckee@lvbusinesspress.com | 702-871-6780 x318

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