Eldorado-Caesars merger leads to unusual decision by NJ regulators

The New Jersey Casino Control Commission, which is supposed to “encourage and preserve competition,” opted instead to further suppress it when it approved the recent merger of Eldorado Resorts and Caesars Entertainment.

Let me stress at the outset, it was a good deal that deserved to be approved. But to properly apply the Casino Control Act, the commission should have required the merged company to do things that the company had agreed to do.  Instead, the commission said it’s ok for one company to own four of the nine casinos, or about 42% of the market, and also control three other casino sites to keep out new competition.

The deal combined Eldorado – which owns the Tropicana Casino Resort – and Caesars – which owns/controls the Caesars, Harrah’s, and Bally’s properties in Atlantic City.  To get approval, they had to show the $17.3 billion merger would not result in “undue economic concentration” and it did not undermine or discourage competition.

To win that approval, the company reached a deal to sell the Bally’s property, which will slightly reduce the economic concentration in the market. The commission relied on that but did not require a sale to be completed. It effectively said the company can keep Bally’s if it makes $125 million of capital improvements.

To win approval, the company also agreed to a condition, recommended by the New Jersey Division of Gaming Enforcement, to lift deed restrictions Caesars had placed on the Showboat, Claridge, and Atlantic Club properties several years ago which prohibited anyone from reopening casinos there. Back then, Caesars didn’t want those reopening and siphoning business away from its remaining casinos, but a lot of people were incensed at the company’s effort to stifle competition.

The company agreed to lift the restrictions, but the commission balked at making that a condition of its approval.

Why? The Ocean Casino Resort and Hard Rock Casino Hotel, which sit on either side of the Showboat property, filed “emergency” petitions to be heard at the hearing.  The two casinos, which opened two years ago, created intense new competition for the other casinos in Atlantic City, drove up their costs and cut into their market. But today they apparently don’t want competition at their doorsteps. The commission refused to let them participate in the hearing, but effectively gave Hard Rock and Ocean what they were looking for.

In rejecting just this one condition out of 40 recommended by the gaming division, the commission said lifting the deed restrictions would “greatly complicate” the hearing on the merger and said it would be an “academic exercise seeking a remedy of perceived ills that are not related to the merger.” Instead, it said that “the benefit of more time will allow study and deliberation on whether or not the restriction should be lifted as well as timing of any changes,” a discussion that should include all stakeholders and consider all viewpoints.

That sounds nice, but the commission has no authority to convene a hearing on this in the future. This was the commission’s only chance to do it; a licensing hearing to reconsider lifting these restrictions can only be reopened at the request of the division of gaming. It should have lifted them now and not worried about the complications later.

If the commission believes there are enough casinos in Atlantic City, it could address it through the standard licensing process. The law says anyone who wants to open a new casino has to produce “a market impact study which analyzes the adequacy of the patron market and the effect of the proposal on such market and on the existing casino facilities licensed under this act; and an analysis of the effect of the proposal on the overall economic and competitive conditions of Atlantic City and the State of New Jersey.”  If those effects are negative, a license could be denied.

Or the commission could consider regulations capping the number. After all, the law does refer to the introduction of “a limited number of casino rooms” in order to reach the public policy goals.   That issue has been raised in the past – going all the way back to the late 1970s – and the commission always decided that the market and the availability of casino-zoned land would determine the number of casinos.  But now the commission has, in effect, endorsed the removal of three large parcels of casino-zoned property from that equation.

The commission did note, appropriately, that coronavirus had a devastating impact on the gaming industry in Atlantic City and it is clear that introducing new casinos now could be detrimental. COVID-19 has eroded the financial position of the casinos and while they hope to get some relief through federal and state stimulus packages, I think it is highly doubtful that anyone would consider investing in a new casino at a time when there is so much uncertainty about the future.  If true, any risk to existing operators from lifting those deed restrictions is purely hypothetical.

But if the market comes back strong and there is a market for new casinos, then the risk to the State of New Jersey from not lifting those restrictions is very real.

Dan Heneghan retired in 2018 as the chief communications officer for the New Jersey Casino Control Commission. He spent 21 years as a reporter covering the casino industry for the Press of Atlantic City.