The Wall Street Journal-20080123-Is a Comeback in the Cards For the Storied Tropicana-
Return to: The_Wall_Street_Journal-20080123
Is a Comeback in the Cards For the Storied Tropicana?
Las Vegas -- The Tropicana Hotel & Casino here was once an icon of Vegas glamour and opulence, the "Tiffany of the Strip" that played host to the celebrity set of Count Basie and Jack Benny. Today, it hosts rows of carts and kiosks selling face cream and magic wands to the sneakers-and-sweatshirt set. At its sparsely occupied restaurant last week, employees could be heard talking openly and hopefully about job interviews at more upscale casinos.
An unfolding mess involving Tropicana's new owner, closely held Columbia Sussex Corp., has left the future of the property in doubt. Long a low-key and well-regarded owner of hotel real estate, the company recently made a splashy entry into the gambling business that was punctuated by a $1.9 billion acquisition of Aztar Corp., which owned the Tropicana and other casinos around the country. The acquisition, made after a fierce bidding war, valued the land under the 34-acre Tropicana site at a jaw-dropping $30 million an acre, moving the price of real estate on the Vegas Strip to unprecedented levels.
To make good on the Tropicana's untapped potential, Columbia Sussex owner William J. Yung III had by now intended to be well on the way toward a $3.5 billion restoration and 9,500-room addition. Instead, plans for the Tropicana are at best on hold, and at worst under an ominous question mark while Mr. Yung manages the fallout of losing another casino, the Tropicana Atlantic City.
In December, for only the second time in 29 years, gambling regulators in New Jersey refused a casino owner an operating license when they yanked control of that casino from Mr. Yung, citing poor management practices, a cleanliness crisis, and a failure to abide by state regulations after Mr. Yung cut 900 employees and, according to regulators, failed to set up an audit committee according to state specifications. Mr. Yung and his lawyers contest that point, saying they worked for months with regulators to abide by state requirements and weren't aware that an audit committee delay was such a critical issue.
The loss of that license, which shocked Mr. Yung and the casino industry, has rocked Mr. Yung's modest casino empire, forcing the sale of the Atlantic City casino and prompting him to sell off other properties to pay off creditors.
Mr. Yung says he can still get his casino operations back on track. "Whether you run a small casino or a big casino, the basics are the same," he said in an interview. "The important thing is, are you a good business man or not. Do you have common sense? We made some mistakes up there, but if you look at the overall profitability of the properties . . . you'll find the Trop is one of the top ones in Atlantic City."
He added: "We'll get this Atlantic City thing past us, and I think there's a chance to get this [Las Vegas] thing financed." He is still making plans for a huge redevelopment of the Tropicana, but acknowledges that getting financing for such a project could be tough given the current credit market, and with so many other large, highly leveraged projects in Las Vegas. Last week, Ian Bruce Eichner, the developer of a twin-tower casino resort in the heart of Las Vegas, defaulted on a $760 million loan from Deutsche Bank AG after he couldn't get refinancing to support his $3 billion Cosmopolitan Resort Casino.
Mr. Yung's casino troubles come at a precarious moment for the casino industry. An unprecedented $35 billion in development is under way in Las Vegas, increasing demand for visitors to keep revenue up; meanwhile Atlantic City is seeing a downturn in revenue because of the impact of a partial smoking ban and gambling options in nearby states.
Mr. Yung's experience also underscores the tremendous risks that casino operators face. While Las Vegas continues to be profitable, and casinos are sometimes said to be "recession-proof," operating a casino has never been more complicated, competitive and expensive. Casino operators face a patchwork of varying state gambling regulations, in which a problem in one state can soon affect operations in others. They also must contend with large unions, most notably Unite Here, which represents 440,000 workers and has played a major role in upsetting Columbia Sussex's entry into the gambling business.
It was into this atmosphere that Mr. Yung leapt from Columbia Sussex's headquarters in Crestview Hills, Ky., to the biggest Vegas stage of all: The Strip.
From the start, the price of Columbia Sussex's deal to acquire Aztar raised eyebrows, especially after larger casino operators pulled out of the bidding, believing the price was too high in order to get the necessary return and rebuild the property.
But Mr. Yung said he was confident the Tropicana Las Vegas would pay off.
"I was really going after primarily the Las Vegas property," said Mr. Yung, who built a successful business as the owner of 70 hotels world-wide, largely operated by Marriott International. Based on his success with hotels, Mr. Yung said when it came to bidding for the Vegas property, "I knew I could afford to pay more than my competitors. I knew what I could develop there, and how many rooms I could develop there, and how much money we could make off the property. I knew that land is so hard to get on the Strip and that is why I went after it."
Mr. Yung said he believes he "got a fair deal," for Aztar and would have paid more because of the potential of the Las Vegas Tropicana: "I would have gone up to whatever it took to get it."
Part of Mr. Yung's strategy was to cut Aztar's operating budget, while simultaneously spending tens of millions to refurbish the Atlantic City casino. In order to get investors on board, Mr. Yung said he had to commit to cutting at least $58 million from Aztar's operating budget.
Mr. Yung said his decision to make cuts in Atlantic City came after he compared Tropicana staffing levels there with other casinos. "The driving force was that these cuts were necessary and that in order to run an efficient business this is what I needed to do," he said. In the end, he said he estimates he cut about $90 million from Aztar's operating budget, and spent $30 million on renovations to Atlantic City.
Mr. Yung blames New Jersey politics and the power of Unite Here. He says union leaders who objected to his staff reductions set out to sabotage the casino, instructing employees to pour sand in toilets to block pipes, and banning hotel housekeepers from cleaning the casino floor.
Mr. Yung's accusations of union sabotage are "a flat-out lie," said Bob McDevitt, president of Unite Here Local 54 in Atlantic City. "That's just an excuse for shoddy appearance and unsanitary conditions" at the hotel.
New Jersey regulators say they drew their own conclusions after careful investigation and public hearings. Meanwhile, Mr. Yung is facing more challenges in Las Vegas from Unite Here, whose employees at the Tropicana have no contract because of an impasse in negotiations. Last month, Unite Here sent Nevada regulators a report and video that alleges prostitution taking place at the Tropicana and urged them to investigate.
A company spokesman previously said the union allegations are suspect because they coincide with a protracted contract battle over employee benefits and wages. "The union engaged in this half-fact public attack in Atlantic City and are engaged in the same sort of warfare here," Hud Englehart said last month. Mr. Englehart added yesterday that there is no evidence of arrests to back up the union's claims. Meanwhile, talks with the union have resumed, he said.
For now, both Tropicanas await their fates. A state-appointed conservator is overseeing the sale of the Tropicana in Atlantic City, and reviewing offers. Yesterday, New York developer Joseph Palladino and a group of investors said they would bid $950 million for the Tropicana in Atlantic City.
