Casino Enterprise Management

The global economy has been in freefall for more than a year, as we all know too well in the gaming industry. Some say the decline has been long in the works citing various reasons, financial, political and otherwise. Regardless of why we’re in this mess, what really matters is righting our course. Looking ahead, it’s not a stretch to say we face a changed business landscape. Making the right choices now and in the years ahead will require a keen historical perspective of gaming combined with a visionary understanding of tomorrow’s gaming industry, equity markets and credit markets, all of which will look and behave differently. We are entering a new era, and getting a good guide for the journey isn’t just smart, it’s necessary. And that’s exactly why I want to talk to you about a great opportunity that has presented itself to the gaming world.

In April, widely acclaimed Deutsche Bank gaming analysts Bill Lerner, Rich Moriarty and Grant Govertsen announced the formation of the Union Gaming Group—a boutique research and advisory firm for the worldwide gaming industry. It stands independently and will be the first of its kind based in Las Vegas. With a goal of being the single most influential resource for gaming, research, advisory and government study, the company is set to take our industry by storm.

Together the group holds more than 40 years of Wall Street experience. Lerner comes from suburban New York, and after earning his master’s degree from Boston University, he started at Deutsche Bank in Latin American equities, later transferring to Mexico City as a research analyst. He came back to work in U.S. equities with Prudential Securities for eight years. Three years ago, he left Prudential and returned to Deutsche Bank, running the U.S. gaming practice from Las Vegas. “When I was working in research initially at Prudential, I was covering consumer-oriented companies,” Lerner said. “I was chomping at the bit to cover gaming. When the opportunity presented itself, I grabbed it.”

Moriarty hails from Massachusetts. “Coming out of the University of Massachusetts as an undergrad, Wall Street was somewhat of a natural progression for me in the sense that I wanted to go to a place that was the most competitive and had highly motivated people,” he explained. “I got very lucky as a young guy.” At 22, he started with Lehman Brothers as an institutional salesman. After a brief time at Susquehanna International Group, he spent the next four years with Deutsche Bank. “Being an institutional salesperson, you often spend a lot of your time as a generalist covering many sectors,” he said. “Very early on in my career, I became fascinated with the gaming industry.”

Govertsen grew up in suburban Chicago and was educated at UNLV. His career brought him back to his old stomping grounds of Chicago where he spent some time with Coopers & Lybrand, but he eventually found his way back to Las Vegas. “I was exposed to gaming via boutique consulting firms and fell in love with the industry,” he noted. “About five years ago, I got my foot in the door at Deutsche Bank. I’ve been with Bill the past three years.”

Moriarty said there were two factors that led the trio to form the Union Gaming Group. “The three of us started to talk about this well over a year ago, and very seldom in your career do you have the opportunity to work with two terrific people,” he explained. With the opportunity to work with each other on top of the lack of resource commitment to the gaming industry, the group decided it was time to branch out. “While other banks were running away from the business, we wanted to run toward it and really embrace Las Vegas and the industry at a time when it sorely needed it,” Moriarty said.

In addition to experience, these men bring deep relationships to their newly formed business. Investors looking for research support will value their access to management and other industry professionals on a global scale. They also bring connections to both European and Asian entities—suppliers and operators. Moriarty said: “Because the public equity markets are so turbulent and so difficult, there’s never been a greater need for expertise and access. Being on the ground, we think there’s going to be an even greater demand for the services we provide.”

Lerner noticed a trend among Wall Street partners leaving to start their own firms with success in other sectors, and realized that gaming had this need as well. “It’s a nonconsensus time for this industry, but we’re three guys that love nonconsensus calls,” Lerner said. “We believe in the long-term secular prospects of this industry—not just Las Vegas but globally.”

The group offers opinions on all relevant publicly traded gaming companies around the world, which will include financial forecasts and a view on the various markets in which they participate. Lerner said their goal is to publish their forecasts and opinions earlier and with deeper insights than their competitors.

With a dedicated focus on research, they plan to leverage corporate and government feasibility work, including tax revenues to assist with budget concerns. “Naturally, gaming becomes a viable way of helping to plug a budget gap in the means of raising taxes without imposing a direct tax on anybody,” Govertsen noted. “There’s going to be a huge need for tribal governments, states and local municipalities to look at ‘how can gaming help us,’ and that’s where we come in.”

They will use viability studies and economic impact studies at a local level, state level and for international government. The group can help draft a bill or provide research support for properties looking to expand.
Some of the more pressing market issues right now lie in too much supply coming online between now and 2011, in addition to companies’ balance sheets. “A number of these companies, like MGM and Las Vegas Sands, move forward with huge development projects prior to being fully funded, which ultimately was one of the contributing factors to some of these balance sheet issues and bankruptcy risks,” Lerner said. The other, he said, is macroeconomics—the decline in visitation and spending per visit.

But despite our currently bleak economic state, the group sees hope. “We think this is a transitory environment from an economic perspective,” Lerner said. “These companies’ revenues and cash flow will recover along with the economy. I would go as far as to say this might be an early cycle sector in that recovery.”

Moriarty echoed that banks are having their own balance sheet challenges, which makes it impossible for them to continue to lend or invest. They did not have a choice, but he believes they’ll be there when the opportunity arises again.

“For gaming stocks to recover and become attractive again, there must be a return of equity value,” Lerner said. “When unemployment flattens out and home prices stop declining, we will see the health of the gaming sector recover. The signals we are looking for have more to do with things being less bad rather than being overly positive. It’s going to be an increase in visitation if we’re talking about Vegas. It’s going to be an increase in spend-per-visit or win-per-unit across various U.S. markets. This will bring stability in room pricing to Las Vegas as well. The confluence of these factors will be important signs to watch.”

Moriarty said: "In a long-tail cycle driven by macroeconomic factors, there isn't going to be that silver bullet the casino operators can point to that the storm is over. It will be the collection of data-points over time that will allow them to build a mosaic. Being on the ground here, and having relationships with those operators, should allow us to put the pieces together faster than any of our competitors."

Lerner emphasized their commitment to the global gaming industry. “Other analysts move on and cover different sectors,” he said. “That’s not our plan. This is a space we’ve embraced, this is a space we have affinity for, and this is a sector we’re marking our careers with. Starting this group, being based in Las Vegas, and embracing this industry underscores that. It’s important for us to get that across.”

With the almost dire state of our industry, we need what the Union Gaming Group offers now more than ever. They have joined the table with skin in the game and are ready to go “all in” for the gaming industry. It should be fun to watch how their hand plays out. 

Peter Mead is the Publisher of Casino Enterprise Management. He can be reached at peter[at]aceme.org or (701) 293-7775.