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PART II
Dealing with High Rollers

A roller coaster ride?

How often in the last few years have we heard of a gaming company blaming lower than expected table game hold for its poor quarter or half year result? The MGM, Mirage, Hilton and most recently Harrah's (or The Rio more particularly) have all fallen foul of low hold percentages. Poor win rates brought about by dealing high limit Baccarat to a select few (predominantly Asian) customers.

Win rate volatility is however only one aspect of volatility that operates in this area to make the business of dealing with high rollers an even riskier proposition.

Volume: Not just of customers but also of total amount wagered. One player I know of turned over $850 million in wagers in one visit to a particular casino. Another turned over in excess of $1.25 billion in the course of a year. Add these players in or out of the equation and volumes can vary dramatically from year to year even though total player visits might remain relatively constant. Analysts and many casino executives often neglect this factor when reviewing results or drawing up next year's budget.

Win Rate: Baccarat is a game of chance and so fortunes can, and do, pass both ways across the gaming tables. The house advantage on Baccarat averages a very low 1.3% to make this close to a true even money bet every time the cards are drawn for a new hand (or coup as it is known). An interesting statistic is that 14,981,640 hands need to be played for there to be a 95% confidence interval of results falling between a win rate of 1.25% and 1.35%. If you multiply this number by a bet of $100,000 you require $1,498,164,503,243 in turnover for win rate "certainty." An astounding number in anyone's view!

Bet Limits: Betting limits should be based on the following criteria. Firstly, establish what the capital reserves of the company are. What are the shareholders' expectations from the operation? Are they risk-averse and therefore averse to using capital reserves to pay losses or fixed expenses? What are the longest and shortest periods that you must analyze? Can the shareholders look to one month but no longer than one year, or can you fix longer term strategies with comfort? What turnover volumes are experienced or forecast? What does the market expect in maximum betting limits and what effect will not meeting these have on turnover? What profiles of games are on offer, or are expected to be on offer? What are the fixed and variable expenses associated with the operation?

Often, however, these questions go unasked and one casino merely follows another in setting their maximum betting limits. So we end up with maximum bets across the board of $150,000 (or higher) and policies like setting a maximum bet for an individual player based as a percentage of their front money, which makes no sense at all. Critically, though, it also means that each casino foregoes asking the critical questions above. Not all companies are equal! A publicly listed company should view this business quite differently to one that is privately held. A view that I'm sure Steve Wynn would now agree with.

Incentives: Dealing with high net worth individuals means that you are often negotiating with very influential businessmen or entrepreneurs. They want the best of everything from six-star amenities (like the Hilton's Sky Villas mentioned in the December edition of CE) to the very highest discounts and commissions. Lose $3 million as a player and write out a check for $2.1 million! While that doesn't sound too bad a deal, on first view, it does not account for those that walk away winners. On average, incentives total somewhere between 50% and 70% of theoretical win. Where casinos get their numbers wrong (which fortunately less do these days due to education programs such as UNR's annual Executive Development Program and information sources like http://urbino.net) you can even find scenarios where the company was only ever going to make money when they "got lucky." That is when win rates were well above the statistical average of 1.3%.

Credit risk: A saying you might hear from executives who deal regularly in this area is "that you have to win the money twice." Essentially, while you win over the tables you also have to have a win by getting paid. Payment plans are common as the players do not want to liquidate assets in the short-term, and some hope to get lucky at another casino in the interim to help pay off a debt. Negotiations are sensitive and further incentives are sometimes used to finalize the payment.

So, is high end Baccarat too volatile? It certainly can be if the company doesn't recognize the full range of risks and manage accordingly. Industry consolidation should help the likes of MGM/Mirage and Park Place in the Vegas market who now generate most of the industry volume in the region. Strong balance sheets are also required as high debt levels and a high risk business are not well suited partners. The Aladdin and its London Clubs operation or The Venetian should be very mindful of becoming overly enamored with high end Baccarat. As for The Rio, that will depend very much on whether or not under new management and with new programs they can generate sustainable turnover volumes. This can be the sexy, sharp end of the business but at the end of the day it is low margin and high risk. Lots of risk!
 
 
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