Wall Street Journal on the Biloxi Story
Here is the text of a story that appeared on the front page of the Wall Street Journal, on Aug. 3, 2006.
Cashing In:
Casinos emerge as winners in wake of Hurricane Katrina; eager to restore tax revenue, Mississippi lets gambling move to onshore locations.
By PETER SANDERS
August 3, 2006; Page A1
BILOXI, Miss. -- When Hurricane Katrina hit last year, wiping out two of the city's 10 casinos and heavily damaging eight others, it looked as if Biloxi's gambling industry would float out to sea with the wreckage.
Instead, it's in the midst of a comeback that could put Biloxi on the road to becoming the southern casino capital it has yearned to be since gambling was legalized here in 1990.
Though no one here will come right out and say it, Katrina -- from which much of the city has barely begun to recover -- was a boon to Biloxi's casinos, washing away old limits that had restrained their growth. The confusion and panic following the storm's devastation gave the gambling industry an opening to muscle through a law change that before was unthinkable in this Bible Belt state wary of casino expansion.
The lifting of a ban on land-based casinos not only helped casinos recover, but gave them more room to grow. As the city's key economic engine, casinos were made a priority of local officials' rebuilding efforts.
"The storm, in a sense, kind of cleaned the slate," says Gary Loveman, president, chairman and chief executive of gambling titan Harrah's Entertainment Inc.
Now, Biloxi Mayor A.J. Holloway predicts a building boom that could double the number of casinos in town during the next few years. The world's two largest casino operators by revenue, MGM Mirage and Harrah's are squaring off with huge new luxury-casino complexes, betting Biloxi will re-emerge as a more upscale tourist destination.
Gamblers already have flocked back to Biloxi, wagering $375 million at the three casinos open in the first half of the year. That's nearly 70% of what was wagered a year earlier in the nine casinos operating before Katrina struck, state officials say.
Mississippi's 1990 law legalizing the casino business had required all gambling to take place offshore, which restricted operations to riverboats on the Mississippi or barges docked along the Gulf Coast. The law made it difficult for casino owners to integrate their gambling sites with other parts of their properties. Biloxi's Treasure Bay casino, for example, offered gambling aboard a docked barge disguised as a giant pirate ship. Its small hotel was located inland hundreds of feet away, across a four-lane highway.
The offshore rule was a compromise, culminating a hard-fought battle against gambling by religious conservatives and state legislators whose counties would see little direct benefit from the casinos. "Everyone was led to believe that by restricting casinos to the water, we would only end up with three little riverboat casinos, when, in fact, we ended up with many more," says State Sen. Hob Bryan, a longtime legislator and gambling opponent from the northeastern town of Amory.
But the offshore law did constrain the industry. Before the storm, the city's casinos were a mishmash of national chains and local operations. Some were little more than gambling halls with modest hotels tacked on, and with none of the glamorous shows, upscale dining and shopping that draw crowds to Las Vegas.
The jewel of Biloxi's gambling waterfront was MGM Mirage's lavish Beau Rivage casino -- known locally as "The Beau." The resort seamlessly integrated its barge-bound gambling floor with a waterside compound of restaurants, bars, a hotel and convention center.
MGM Mirage had the luxury end of the market to itself. The closest upscale competition in sight was a new Hard Rock Hotel & Casino that had been scheduled to open two days after Katrina hit. Harrah's was a more recent arrival to the market. Its acquisition of Caesars Entertainment Inc. in June 2005 brought it two casinos, one in Biloxi and one in nearby Gulfport, Miss.
Katrina pummeled the new Hard Rock and its towering $2 million neon guitar before the casino had even opened its doors. Other casinos were heavily damaged, and most of the gambling barges were wiped out. Damaged roads, housing and other infrastructure made it difficult for casino employees to stay in the area.
Mississippi officials worried that the lucrative gambling industry might pack up and leave for good, magnifying the disaster. Before Katrina hit, Biloxi last year had collected $20 million in tax revenue from the casinos, enough to cover 35% of the city's annual budget. Casinos had helped keep the area's unemployment levels lower than the state average and provided a thriving service industry that supported casino workers and tourists visiting the region. Beau Rivage, alone, employed 3,400 workers.
State gambling officials traveled to Las Vegas within a few days of the storm to get a sense of the reaction back at the casino companies' headquarters, says Jerry St. Pé, chairman of the Mississippi Gaming Control Board. To his relief, both MGM Mirage and Harrah's assured him they were committed to recovering their operations in Biloxi, he says.
But in the early days after Katrina, the two major casino operators' interests were at odds. Harrah's immediately began campaigning for the law to be loosened to allow the casino to rebuild onshore. Its casinos in Biloxi and Gulfport were destroyed, and the company didn't want to risk building on the water again. Changing the law also would allow the company to consolidate its gambling hall and resort facilities on land.
Harrah's Mr. Loveman, though, stressed public-safety concerns in his pitch to legislators: If another hurricane struck, it would be safer for casino employees and guests if the gambling floors were on land, he said. It was an argument that resonated in a region still littered with the debris left behind by Katrina.
MGM Mirage wasn't so eager to rush into changing the law. Its hotel and gambling resort weathered the storm better than others. MGM Mirage Chairman and Chief Executive Terry Lanni and other company officials toured the inundated Beau Rivage on Sept. 6, eight days after the storm. While the ground floor was wrecked, and mold was forming inside the unventilated guest rooms, the 1,740-room hotel tower survived. So did the Beau's technologically advanced casino barge, which had been modeled on offshore oil and gas platforms.
Isle of Capri Casino, Aug. 30, 2005: The casino, located on a barge just offshore, suffered heavy damage (top); May 2006: Reopened on Dec. 26, the casino is part of the onshore resort's 731-room hotel.
Beau Rivage was in a position to recover more quickly than its Biloxi competitors. If the offshore requirement was dropped, its rivals might rebuild much further inland in more commercially desirable areas, such as next to the freeway. MGM Mirage would then be forced to relocate to stay competitive, and it would lose the edge it had retained after the storm.
So a week after Katrina, Mr. Lanni publicly committed to repairing the Beau Rivage. But, he cautioned, "It would be a significant mistake to consider making changes to the law in the midst of the crisis at hand."
In a special session called by the governor in September, MGM Mirage found itself aligned with religious groups that opposed changing the law for fear it would allow gambling to spread throughout the state.
But the gambling industry found new leverage in the storm's wake. In the 15 years since it was legalized, casinos had become the region's key economic driver. When the storm's destruction knocked the Gulf Coast's industry out of operation, the state saw an 18% drop in the tax revenue generated from casinos. In fiscal year 2005, casinos contributed $334 million to state and local coffers. In 2006, it was down to $273 million.
A compromise was forged to allow gambling facilities to move on land within an 800-foot-wide strip along the shoreline. The restriction confined the gambling to an area already zoned for casino-resort development, though previously only the nongambling elements such as hotels and restaurants. The new law didn't affect casinos along the Mississippi River, or open new areas for casino development. MGM Mirage accepted this version of the law, reassured that it would not have to relocate its casino.
But other gambling opponents worry that the casinos will continue to push for further loosening of the law, says William Perkins, editor of the Baptist Record news journal and spokesman for the Mississippi Baptist Convention, which lobbied against the change.
"I don't think anybody rationally believes that this is the end of their [casinos] creep northward," he says.
The loosened restrictions freed Harrah's to launch ambitious plans for consolidating and expanding its Gulf Coast casino operations in Biloxi on a scale to rival MGM Mirage. It sold its damaged Gulfport casino for a reported $55 million. Then it struck a deal with Pinnacle Entertainment Inc., which owned the damaged Casino Magic property right across from Harrah's Grand Biloxi. Pinnacle traded the Casino Magic to Harrah's in exchange for two Lake Charles, La., gambling riverboats and $25 million.
Harrah's plans to reopen the Grand Biloxi on Aug. 17. But the casino company's biggest play in the market will be a $1 billion new casino resort that will target the kind of upscale clientele cultivated by MGM Mirage's Beau Rivage.
MGM Mirage, meanwhile, is in the midst of a renovation at the Beau that will cost more than $500 million. It will retain the floating gambling barge, but will upgrade rooms, redecorate public spaces, expand the casino and add restaurants on par with those found at the company's Las Vegas properties.
"We're building a property here today that can compete with projects built two or three years down the road," said George Corchis Jr., president and chief operating officer of MGM Mirage's Mississippi properties.
The casino operators have been spurred by a post-Katrina federal tax credit designed to encourage rebuilding after the storm. The credit applies to construction of nongambling facilities, including hotels, restaurants and retail outlets, that open for business along the Gulf Coast before the end of 2008.
Other new competition will be crowding into the Biloxi market. Isle of Capri Casinos Inc., a regional operator, is planning a new $300 million project in the Biloxi area. Atlantic City-based Trump Entertainment Resorts Inc. in June announced plans to build a casino resort in nearby Diamondhead, Miss. The Indian tribe that runs the Foxwoods casino in Connecticut recently proposed a $400 million resort casino on the site of a Biloxi casino that perished in Katrina.
A year after Katrina passed through, Biloxi's Mayor Holloway continues to grapple with a critical housing shortage, skyrocketing construction costs and squabbles with state agencies over badly needed road repairs. But he has worked hardest at reviving the casinos. The 67-year-old mayor began his fourth term last July -- a month before Katrina. The city's future, he says, depends on companies like MGM Mirage and Harrah's putting Biloxi in the same sentence as Las Vegas and Atlantic City.
"Before the first casino opened here in 1992, our police department only had five or six patrol cars and not enough money to buy them new tires," the mayor says. "Today we basically have a police car for every officer and excellent public services."
On Mr. Holloway's city hall desk is a massive three-ring binder containing details of a master plan proposed for the eastern part of the city. In the plan, a new four-lane boulevard would wrap around the city's eastern edge, with casinos dotting the waterfront. The design is packed with high-rise condominiums and parks.
"I don't see any problem with casino expansion where it's already zoned," he says. "In five to 10 years, I think we could see 18 to 20 casinos here."
Casino executives are eager to see Mr. Holloway's vision come to pass as billions of their dollars flow into the city. "After Katrina, we looked at this as an opportunity for this market to come back as a better destination," says Anthony Sanfilippo, Harrah's central division president.
The rebuilt industry is still in a prominent hurricane alley. But casino executives downplay the threat of future storms and a repeat of the devastation. Rebuilt casinos are designed to be at least 35 feet above sea level, which should be enough to buffer them from tidal surges, they say. That theory may be put to the test sooner rather than later; Tropical Storm Chris, gathering strength in the Caribbean, could move into the Gulf of Mexico as a hurricane by next week.
© 2006 Dow Jones & Company
