Flailing economy cited in Boyd’s decision to postpone further construction of Echelon project

By Liz Benston

Published Friday, Aug. 1, 2008 | 10:23 a.m.

Updated Friday, Aug. 1, 2008 | 1 p.m.

Boyd Gaming announced this morning it would delay its $4.8 billion Echelon resort on the Strip until the capital markets and the broader economy improves. The announcement triggered a 20 percent increase in the company’s shares.

Boyd's stock has been clobbered by investors who, beyond their concern over the general economy, didn't believe Boyd could pull off the resort, which would be the largest and most luxurious in Boyd's portfolio. Shares had tumbled below $10 this month.

Wall Street analysts had speculated that Boyd would either delay the project or seek another joint venture partner to replace Morgans Hotel Group, which was having trouble raising cash.

Boyd, which disclosed the news in its second quarter earnings release, said it is bullish on Las Vegas' long-term future and expects to resume construction on the project next year.

"We have a strong core business and while our results are lower year over year ... we still have a strong balance sheet," Boyd Chief Executive Keith Smith told investors today. Yet the capital markets, he said, are "effectively closed."

Boyd had secured relatively cheap financing for the company's $3.3 billion, wholly owned portion of Echelon, including two hotels and a main casino resort, before the economy soured.

But two joint ventures formed to build key components of the project were unable to lock up financing. One is a $1 billion, 50-50 partnership between Boyd and Morgans Hotel Group, which planned to build two boutique hotels.

Another is a $500 million partnership with mall developer General Growth Properties, the builder of a retail promenade at the Echelon site.

Boyd had planned to open all of Echelon in 2010.

The New York hotelier, which planned to build a Mondrian and Delano on the site, said today it was unlikely that the company would have been able to secure construction financing with "favorable rates and conditions" by an extended deadline of September 15.

Smith said the company wants to work with Morgans when Echelon resumes but said the company would look elsewhere for other boutique hotel brands if Morgans is unable to deliver.

The company notified contractors this morning at the site. About 800 workers have been working at the resort, which began construction several months ago.

Executives said they didn't know how many workers would be furloughed. To save construction costs, Boyd had pre-purchased raw materials including steel that will be stored until the project can resume, they said.

Revenue at the company fell 10 percent in the second quarter versus a year ago and operating earnings, excluding certain items, fell 12 percent.

Boyd's locals casino business in Las Vegas fell 7 percent on that measure, as executives said they were able to cut costs with less profit. Boyd's downtown casinos reported a 22 percent decline in operating earnings as higher fuel costs cut into the company's charter business ferrying gamblers from Hawaii.