MGM Mirage’s choice: leave Atlantic City rather than sever ties with “unsuitable” Pansy Ho

Why the New Jersey Casino Control Commission is important

The New Jersey Casino Control Commission came into prominence as the most vigilant of the state government agencies overseeing legalized gambling in the Seventies, when Atlantic City was establishing itself as a gaming destination.

At that time investors generally avoided what publicly traded casino companies there were, fearing that the industry had associations with organized crime that would express themselves in money laundering, underreporting of profits or other illegal activities.   But the rigorous application process established by the Commission and the careful screening by its Enforcement Division were, I think, the main vehicles in reversing investor opinion to its present, casino-friendly state.

What it decided about MGM

MGM entered the Macau gambling market through joint venture.  The original concept was to have Stanley Ho as a partner, but even typically less rigorous US regulators voiced strong opposition, given Mr. Ho’s links with organized crime in Asia.  So the company decided to do a deal with Pansy Ho, one of Stanley Ho’s daughters, instead.

This change was enough to allow MGM to get the approval from Nevada regulators for the expansion into Macau–but not from New Jersey.

The local Trenton newspaper, the Trentonian, has a good summary of the New Jersey Casino Control Commission’s findings.  The 70+ page report from the Commission’s Division of Gaming Enforcement–released with the most sensitive data edited out–also has interesting information, although the reading is a bit tedious.

The Gaming Enforcement findings:

1.  Stanley Ho is “unsuitable” to hold a casino license in New Jersey because ” numerous governmental and regulatory agencies have referenced Stanley Ho’s associations with criminal enterprises, including permitting organized crime to operate and thrive within his casinos.” , and

2. “upon concluding that it could not partner with Stanley Ho or entities under his control, and without conducting adequate due diligence on her suitability, MGM simply substituted Pansy Ho as its joint venture partner despite her financial dependence upon Stanley Ho and his companies.”  In other words, Ms. Ho was little more than a figurehead representing her father’s interests.  In addition, the top management of MGM also seemingly “forgot” to supply the regulators or its own internal compliance department with negative suitability information they learned about Ms. Ho.

The Casino Control Commission’s decision

The Commission, in a decision rendered last May but just made public this week, told MGM to either sever its ties with Ms. Ho or it could no longer operate a casino in the state.

MGM’s response?

It has decided to sell its 50% interest in the Borgata casino and leave New Jersey.  I assume that this is a purely commercial decision–based on the idea that MGM’s Macau interests are more profitable and have better growth prospects than its Atlantic City holdings.

about Stanley Ho

He’s never been indicted for, or convicted of, any offense relating to his asserted underworld connections.  There’s no proof that he ever was, or is now, a triad member.  Of course, given Mr. Ho’s advanced age, initiation rites might have been three-quarters of a century ago.

It seems to me that this is a taboo subject among securities analysts in Hong Kong.  In twenty-five years of watching that market, I’ve never read an analyst report or met privately with an analyst where the subject of triad links ever came up.

On the other hand, gaming authorities in Australia, Singapore and the United States are convinced enough about Mr. Ho’s associations that they have made it clear that no one associated with Mr. Ho will receive a casino license.

In response to the release of the New Jersey report, Mr. Ho has denied any triad involvement.

Why, then, would MGM partner with the Ho family in Macau?

In the initial round of concession-granting, the Macau government selected Mr. Ho, the incumbent, plus WYNN and LVS.  MGM submitted an application but reportedly finished fifth.  One might reasonably defend this decision by pointing out that WYNN, a specialist in high-end gambling, and LVS, a specialist in conventions, both have more focussed skills than MGM.

In the second round of concession-granting, which involved sub-concessions being issued by the original three, MGM elected to partner with Mr. Ho rather than one of its Las Vegas rivals.  I imagine that MGM regarded this as purely a commercial decision to select the lesser of two evils, since Mr. Ho has no (and can have no) competing Las Vegas interests.  I disagree with the choice.

Investment implications:

I think the Ho connection is a serious problem for MGM, but I’m not sure anyone else does as yet.

Yes, Macau apparently regards MGM as a weaker casino operator than either WYNN or LVS.  But I don’t believe that matters much.  The main issue, I think, is one of damage to MGM’s reputation through an indirect link with organized crime.

That damage could come in one of several ways.  Talented managers might worry that working for a Ho-related casino company would limit their future career prospects.  Customers might similarly choose not to patronize Ho-family enterprises.  Investors might also perceive higher risk in holding Ho-related stocks, or simply prefer to hold other issues.

I don’t perceive any of this last possibility as being present in today’s stock trading, either in the US or in Hong Kong.  In the US, investors set great store in the integrity of management.  In this case, I don’t think investors are aware of the question marks over MGM, even though it has gotten some publicity in the financial press on the release of the New Jersey report.  In Hong Kong, where every local investor is aware of questions about Mr. Ho’s background, the market seems more focussed on the worries of whether Las Vegas Strip-style gambling can ever prosper in Macau, and of whether the availability of gaming in Singapore will limit Macau’s expansion potential.

I’m not sure it matters to customers looking for a cheap hotel room in Las Vegas whether they stay with WYNN or LVS or MGM or someone else.

My guess is that the main damage to MGM will be seen in difficulty attracting the best talent to work in its operations in Macau.  I presume this will show itself in a gradual loss of relative market share.  MGM would face a more serious problem if this aversion were to spread to Las Vegas operations as well.

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