Reflections on the Tropicana Debacle: How to Lose a Casino License
By Frank Catania

On Dec. 12, 2007, the New Jersey Casino Control Commission (NJCCC) issued its decision on the relicensure of Adamar of New Jersey Inc. d/b/a Tropicana Hotel and Casino in Atlantic City. By a 4-to-1 vote, the commission denied a license to Tropicana and found Tropicana’s new owner, Tropicana Casinos and Resorts Inc. (TCR) — which had recently purchased Tropicana’s former owner, Aztar Corporation — unqualified to operate a casino in New Jersey. By all accounts, TCR’s operation of Tropicana during the post-purchase period, as well as its presentation at the NJCCC hearing itself, constituted, in a word, a debacle. But how could this have happened? How could a company with enough business acumen to raise sufficient funds to win a bidding war for one of the largest gaming companies in the world appear so inept at actually operating a casino and achieving licensure? An analysis of the commission’s decision reveals so many missteps by TCR along the way that this case presents a textbook example of how to lose a casino license.

First Misstep
As part of TCR’s request for preliminary approval to purchase Aztar, TCR’s owner, William J. Yung III, told the NJCCC that although there might be some cuts in the Tropicana staff, he would “try to make most of those reductions through attrition.” However, during the “roadshow,” when the company was trying to market $960 million in high-yield notes to finance the purchase of Aztar, investors were told that TCR could eliminate $30 million to $40 million from Aztar’s payroll. That roadshow estimate was never shared contemporaneously with the New Jersey regulators, and Yung’s actions were later viewed by the commission as duplicitous.

Second Misstep
Once TCR had acquired Aztar, it began a massive wave of layoffs at the Tropicana. As the commission stated: “Having begun January 2007 with over 4,000 employees, Tropicana at the end of 10 short months was operating without at least one-fifth (20 percent) of its former workforce.” These cuts, seemingly bottom-line driven with little or no analysis of the consequences, resulted in a deterioration of service that manifested itself in customer complaints of unclean bathroom facilities, bedbugs, dirty guest rooms, and long waits for hotel, casino and restaurant services. The Tropicana was later forced to rehire some staff, but by then, much of the damage had already been done — customer word of mouth and negative publicity drove business elsewhere.

Third Misstep
During the months of massive layoffs at the Tropicana, TCR only sporadically kept regulators advised about the impending cuts. This became a particular point of contention regarding layoffs in departments like security, which are mandated by regulation. The lack of sufficient staff resulted in numerous regulatory violations, prompting the commission majority to characterize the Tropicana’s regulatory performance since the TCR acquisition as “abysmal.”

Fourth Misstep
Under New Jersey law, a casino or holding company is required to have an independent audit committee to which supervisors of mandatory departments report. As the commission observed, “[T]he requirement of an independent audit committee, operating outside the audit, control and domination of management, is a critical component of the regulatory apparatus.” However, from January through June 2007, TCR and the Tropicana were without an independent audit committee, mostly because TCR continued, perhaps in an effort to save money, to propose committee structures dominated by existing management. This serious violation not only drew the largest fine ever imposed by the NJCCC — $750,000 — but was one of the factors cited in the commission’s denial of qualification to TCR.

Fifth Misstep
The commission’s decision identified a certain arrogance in the approach of TCR to the New Jersey casino regulators. As the commission stated: “ The Atlantic City model works well because it involves a mutual level of cooperation and trust between the regulators and the regulated that is unparalleled worldwide. Simply put, Yung exhibited a lack of cooperation on a grand scale that did nothing to earn regulatory trust in his ability to operate in this marketplace.”

This arrogance was reflected in TCR’s poor presentation at Tropicana’s licensing hearing, where the testimony of the company’s witnesses was found to be poorly prepared, incomplete, inaccurate, evasive, unbelievable, hollow and, in one instance, perjurious.

As a concurring commissioner put it: “If this commission is to be held in high regard, it must demand that its hearing process is taken seriously. The granting of a renewal of a casino license is never guaranteed. In the hearing that has just concluded, I was left with the impression that the applicant felt that the process was just an inconvenient formality.”

Based on the entire record, the commission majority questioned Tropicana’s operation as a first-class facility; found that the casino, as operated by TCR, had failed to establish sufficient business ability; and concluded that TCR had failed to establish its financial integrity and good character. Already a disaster for TCR and Yung in New Jersey, these latter findings could have serious negative consequences for their gaming licenses in other jurisdictions as well.

Lessons Learned
So what are the lessons of this case? The obvious ones are not to lie to or be uncooperative with gaming regulators, and to take regulatory requirements and proceedings seriously. The broader ones involve the new economics of the gaming industry, specifically, the role and goals of private equity financing.

It is widely perceived that, similar to the leveraged buyouts of the 1980s, the current wave of equity purchasing of gaming companies has a short-term goal only: to make money for investors. That may mean adopting a TCR-like business model of minimize expenses and maximize profits. But what happens when that business model collides — as it apparently did here — with casino regulators’ longer-term goals of maintaining first-class casinos that will grow and expand? Will equity financing of takeovers be deterred or will their goals be modified to encompass the longer term? On these questions, the jury is still out.