The Tropicana Hotel in a 2008 file photo.Ethan Miller/Getty Images
How much fun private equity firms are having in Las Vegas these days depends entirely on how many chips they put down.
For the owners of Harrah's Entertainment Inc. (whose properties include Caesars Palace, among others), there were a lot of chips at the top of the market and it's not much fun.
The company today scrapped its initial public offering citing market conditions -- a bit dubious given how well the General Motors IPO went. Analysts are saying the real problem is that Harrah's was too expensively priced and has too much debt after the private equity takeover in 2008 by Apollo and TPG Capital.
But all is not gloomy in Vegas.
For Onex Corp., the owners of the Tropicana, there weren't many chips at all, because the firm waited until the bottom fell out of the gaming market and bought the Tropicana out of bankruptcy after purchasing its debt. As a result, Onex is very up on its investment in the Tropicana.
Onex , its funds and its management own about three quarters of the Tropicana at a cost of about $250-million (U.S.) and are now in the midst of a huge $100-million reno (click here to see a picture of just how huge).
The numbers for revenue at the Tropicana aren't sparkling, according to an Onex disclosure. Revenue in the most recent quarter was down by almost a third, as the hotel has closed whole sections to revamp them.
For the first nine months of the year, reno costs have totalled $56-million (U.S.) and the hotel has posted an operating loss of $27-million.
But on other numbers, things are looking up. The Tropicana is getting better reviews from visitors, and it's renovation is getting noticed. Average room rates are rising (though that's not just true of the Tropicana, the rest of the city is seeing a bump too from very depressed levels).
Besides, Onex chief executive officer Gerry Schwartz is of the view that a downturn is a great time to do a reno. Onex can get workers and goods cheaper, picking up fixtures that had been destined for other now-mothballed projects for pennies on the dollar. Also, the opportunity cost of closing down whole floors for a reno is lower when demand for rooms is down. Odds are, nobody would be in them anyway.
Still, the success of the Trop investment in some ways will depend on whether Onex has called the rebound of Vegas right.
The Trop is a bet not just on the return of gamblers to the city, but also on a specific crowd's return. The Tropicana is a play on the belly of the market in Las Vegas. It's aimed at a more value conscious traveller than the high roller crowd that historically leaned toward the Bellagio and other top-end hotels.
But if its new rooms and look can move the Tropicana up market from its formerly bargain basement niche, it should be able to wring a few more dollars out of middle America, and maybe also catch some of those high rollers who are not quite so high rolling and are now watching their pennies a bit. In that case, Onex may have put its chips on the winning part of the table.