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THE WINNER'S CURSE, PART III: DUMB ACQUISITIONS AND FORMER CEO'S

(previously posted under Keith McCullough: 06/09/08 2:21 PM EST)


The Winner's Curse strikes again after another CEO was forced out following a disastrous casino acquisition. William J. Yung III stepped down as CEO of Tropicana Entertainment after pressure from bondholders.

Recall that Columbia Sussex, with Mr. Yung at the helm, won the bidding war for Aztar Corporation (owner of the 2 Tropicana casinos) in 2006 with its top tick 12x EV/EBITDA multiple offer. By the way, the AC Trop performance has been disastrous since the acquisition so 12x is not even reflective of how much they overpaid. EBITDA declined 15% in 2007 and 20% in Q1 2008. No surprise Tropicana recently filed for Chapter 11 protection.

The good news is that, at least in US Gaming, CEO's like John Bushy of ASCA and Mr. Yung are being held accountable for outrageous value destruction.

GAMING AND TAXES: THE NEVER ENDING BATTLE

(previously posted under Keith McCullough: 06/19/08 6:32 PM EST)


Boom or bust, State governments will continue to pump water from the spring, in this case extract tax dollars from their favorite well: the casino industry. There is a battle raging in Nevada on how to close the growing budget gap. The Teachers Union originally proposed a large increase in the gaming tax but compromised with some casino companies to offer an increase in the hotel tax. Terry Lanni, MGM CEO, opposes an increase in the hotel or gaming tax and suggested raising the payroll tax among other measures. Get used to this folks. Unfortunately, most state governments were unwilling to curtail spending growth during the most recent economic boon. With receipts likely going lower in many states, governments will need to find more revenue. We've watched this sitcom before and it's not very funny. If the gaming industry is already paying its fair share , its share is likely to get fairer. Whether it's Nevada, New Jersey, or the riverboat markets, someone's taxes are going higher. There is a break in the clouds, however. New markets are born out of the economic bust periods due to, you guessed it, the quest for new tax revenue sources.

US GAMING VERSUS POPULISM

(previously posted under Keith McCullough: 06/10/08 2:24 PM EST)


US Gaming Versus Populism:

There was a WSJ article this today detailing increasing federal scrutiny of MGM's CityCenter construction site in Las Vegas. There should be. Six workers have died since commencement of the project in 2006.

The article is actually fairly balanced but wait until the rest of the Main Street media gets a hold of this one. Greedy corporation risking workers' lives to collect a $100 million bonus from a Middle Eastern Sovereign Fund (Dubai World) to finish construction on time.

I'll be waiting to pick up my NY Times one morning to see the headline:

"MGM, Oil Money, and The Value of Union Lives"

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EYE ON POPULISM: WOULD THIS VOTE HAVE GONE THIS WAY UNDER THE EMPLOYEE FREE CHOICE ACT ?

(previously posted under Keith McCullough: 06/19/08 6:38 PM EST)


At Research Edge we have our Eye on a potential Union comeback in this country. In a close vote, security guards at MGM's Mandalay Bay in Las Vegas voted against the International Union of Security, Police and Fire Professionals of America. Of course, consistent with our democratic traditions, the vote was conducted through the secret ballot. Obama and a majority in Congress have indicated they would pass the Employee Free Choice Act which would effectively replace the secret ballot with an open petition. My view is that union elections become less free under this measure and in this case the vote would've been radically different.

ORIENT EXPRESS (OEH): LOOKS LIKE KOPIN TAN MISSED THE BOAT

(previously posted under Keith McCullough: 06/09/08 10:22 AM EST)


We're fascinated with how some of the Barron's reporters gather their "information." But we have our EYE's on them. Barron's reporter, Kopin Tan, looks to be getting no "pop" from his buy OEH note this weekend. The stock is actually down on the open here. Why?

OEH maintains all the characteristics of a Wall Street darling and, indeed, Barron's Tan is now swimming downstream with the crowd. Anyone fishing for the usual Wall Street bait can find it here.

A beaten down stock, smart and activist involvement, hidden assets, and a very high end product that appeals to the tastes of the wealthy Wall Street crowd.

Haven't we heard these fish stories before? The facts are that almost every lodging stock is down significantly more than OEH. OEH is currently yielding the smallest dividend and free cash flow in the entire sector. Oh yeah, it is also the most levered.

Sure there is some untapped real estate value but at a multiple of almost 14x 2009 EBITDA I think we can safely say that it's in the stock. Besides, reeling in real estate value in this credit environment is not quite like shooting fish in a barrel.

If there is a play in lodging right now it is a global one, but not the kind that OEH offers. The only global growth story is hotel brand penetration and unit growth, not RevPAR growth. Last I checked, OEH didn't have a brand. Let's face it. Global growth is slowing. This is not good for OEH's future RevPAR.

3 in 9 = Pain

Not sure if anyone is paying attention, but India's inflation rate has gone parabolic. India only represents 5% of US apparel, but is a huge margin buffer when China holds firm on price. That buffer is officially gone.

India's wholesale price index jumped from 8% to 11% over the past 9 weeks - its steepest increase in years. Since the 'buy Ch-India' trade started its implosion in October, wholesale prices went from 3% to 11% -- and GDP is now rolling the other way. So it was in a mode for 3 full years where nominal GDP outpaced inflation by a solid 3 points. That's changing.

While this is flat-out bad for India, I'm still of the view that the impact on the apparel industry of the culmination of events in China, Thailand, Indonesia and India will fly under Wall Street's radar. That is -- until CEOs admit that industry margins are 2-3 points too high. Certain models are prepared for this -- like Ralph Lauren and Liz Claiborne. Others, like Guess? Warnaco and a host of others, are not.
  • The first Exhibit shows that over the past 7 years, China's share of US apparel imports went from 8% to 30%. That was a seismic event for the industry. The share gain was very steady, with one major exception - the first 3 quarters of 2006. During that time period, China began to hold firm on price, subsequently lost share, and it went right into India's pocket.
  • Now, China is holding firm on price again, simply because it can. But with rampant inflation in India and Singh fighting to tame social unrest to secure re-election, I'm not so sure if India will be there to bail out US apparel importers by hacking prices and eating the margin pinch like it did in 2006.
  • Yet more proof that the US apparel industry needs to pick one of three options; a) either succumb to the prospect of sustained higher prices out of Asia, b) find some ingenious way to grow margins in a slow growth, high-cost environment (i.e. M&A), or c) attempt to pass through higher prices to consumers, and likely take it on the chin with unit demand.

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