Herbst’s profits burned up by smoking ban, gasoline prices

By Liz Benston

Tuesday, March 4, 2008 | 2 a.m.

These are tough times for Herbst Gaming.

The company, one of Nevada’s largest operators of slot machines in small locations such as convenience stores, grocery stores and bars, has reported a loss for 2007, in part because of the 2006 smoking ban in slot bars. Customers who now must step outside for a smoke are cutting short their gambling, resulting in less slot revenue, executives said last year.

But that might not be the worst of it. The company’s three casinos in Primm, acquired from MGM Mirage last year, have suffered as gasoline prices have risen.

While Strip casinos have seemingly avoided much of a pinch from rising gas prices, the Primm properties near the California border cater to budget-conscious visitors and are therefore more susceptible to higher gas costs.

That might be one reason why Herbst says it has hired an investment bank to explore “recapitalization, refinancing, restructuring or reorganization ... or a sale of some or all of its businesses.”

Bank lenders have told Herbst, leveraged with bank loans and bonds, that the company has until the end of this year to reduce its debt. By hiring Goldman Sachs, the company appears to be getting a jump on a plan to do so.

In a statement, Chief Executive Ed Herbst said, “The recent impact from (Ballot) Question 5, the Nevada smoking ban, and general economic weakness has required us to explore our alternatives. We are confident that our retention of a financial adviser will help us capitalize on the strength of our brand and position the company to maximize long-term value.”

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Critics say casinos can well afford higher state gaming taxes. But maybe not, based on one Las Vegas company’s efforts to expand in Florida.

Boyd Gaming has postponed building a casino at a jai alai facility the company bought a year ago near Fort Lauderdale until the competitive playing field in Florida levels between tribal and nontribal operators.

The casino doesn’t make financial sense now because, among other reasons, it would be competing against a proliferation of slot machines operated by the Seminoles, who aren’t subjected to the state’s roughly 55 percent gaming revenue tax, Boyd executives said Wednesday during the company’s fourth-quarter conference call.

Boyd and others are hoping for legislative action to reduce the tax rate.

“The numbers relative to all of our expectations are still substantially below where our expectations were when everybody went into that market, and frankly do not support a tax rate over 50 percent based on the capital investment that is required,” Boyd Chief Financial Officer Paul Chakmak said.

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Since Harrah’s Entertainment went private in January, the company has been fairly quiet about its growth plans in Las Vegas and beyond. But that might be a function of its scaled-down public relations and marketing staff.

During the company’s fourth-quarter conference call Wednesday, executives spoke enthusiastically about an under-construction hotel tower at Caesars Palace and plans for a previously discussed stadium behind the company’s Paris Las Vegas and Bally’s casinos.

The 20,000-seat stadium plan, which still has plenty of skeptics, would be built by stadium and entertainment company AEG, which would also have naming rights to the building.

The stadium would be built with a mostly tourist population in mind and would be able to accommodate a professional team as well as special events, concerts and award programs, Chief Executive Gary Loveman said. The stadium would also feature sky boxes that would be customized and occupied by their casino owners year-round, he said.

The 665-room Octavius Tower, part of a $1 billion expansion at the company’s Caesars flagship, is on track for a 2009 opening.

Executives said they are still working out a final figure for how much money the company plans to spend this year improving existing properties, excluding new construction projects.