The Tropicana Las Vegas Hotel and Casino stands in Las Vegas, Nevada, U.S., on Saturday, Oct. 1, 2011.Ronda Churchill/Bloomberg
Onex Corp. didn't think its big investment in Las Vegas was a gamble.
On its first quarter earnings call Friday, the Toronto-based private equity firm detailed how its investment in the Tropicana Las Vegas hotel and casino fell short of its expectations, attributing the disappointment to a slump the city hasn't yet recovered from, as well as some issues getting people to open their wallets on the casino floor.
The goal was to refresh and revive a classic Las Vegas hotel that opened in 1957, during a decade where the Rat Pack and other major stars of stage and screen were attracting an increasing number of tourists to the desert oasis. But when Onex and a partner invested in 2009, the hotel was badly in need of rejuvenation and was just emerging from bankruptcy protection. The economic downturn, which hit Las Vegas hard, was also perceived by Onex as an opportunity to buy a distressed asset and benefit from the recovery.
Six years later, the company had completed what Onex chief executive Gerry Schwartz called a "total physical and operational restructuring" that "repositioned the property to appeal to the middle-market customer." While the effort was on time and on budget, the hotel's gambling profits and hotel room rates were short of expectations. In late April this year, Onex and long-time entertainment executive Alex Yemenidjian agreed to a deal to sell Tropicana to Penn National Gaming for $360-million (U.S.), with Onex taking just $50-million of that sale's proceeds.
So what happened?
"It was the big downturn starting in 2008 of Las Vegas in total that really was the most costly aspect of this," said Mr. Schwartz on a conference call with analysts. Onex expected the pain of the recession would recede within a couple of years. The firm also counted on the property value to cushion the investment, Mr. Schwartz added. "What we really sold was the land, and that is what protected the downside."
Nevada's economy is still on the mend and projections for employment aren't estimated to return to 2007's levels until mid-2016, according to Nevada's Department of Employment, Training and Rehabilitation.
But there was more to the disappointment than just the scars left by the financial crisis. Though several mega projects were delayed, cancelled or remain incomplete – like the $2.9-billion Fontainebleau Resort Las Vegas – the landscape remained competitive.
"Some new supply came on stream as well, at the high end, and that also kept room rates down," said Tim Duncanson, managing director at Onex. While Mr. Duncanson said the execution on fresh new rooms and the hotel space were done well, the Tropicana ran into difficulty increasing gambling revenues by more than just keeping pace with the market's recovery. "And that was part of our thesis, and I think we just didn't get some of the operating and promotional and marketing efforts correct," he said.
That combination not only hurt profits, but also affected the company's vision to grow the business.
"We intended to build a network of other casinos to help drive business to Tropicana. It was a hub-and-spoke sort of thesis," Mr. Duncanson said. "And when we weren't able to execute on other casino operations, we emulated that with the Hilton franchise agreement, which was really, frankly, a coup, and that really has driven room rates up lately." The agreement made Tropicana a DoubleTree by Hilton hotel, letting customers earn and redeem Hilton HHonors points and airline miles, without making changes to ownership or operations.
Still, for Onex, it might have been better to heed the advice of Frank Sinatra. "Las Vegas," he once said, "is the only place I know where money really talks – it says, 'Goodbye.' "