Betting on Casinos : Hilton’s Hotels Take a Back Seat to Gambling in Global Investment Plan
When Hilton Hotels chose a new president in February, the company synonymous with lodging named a man who had never run a hotel. In fact, the closest Raymond J. Avansino Jr. has come to hotel management was during his college years, when he parked cars and waited tables at a hotel-casino in Reno.
“I don’t want to run a hotel because I wouldn’t know how,” Avansino said.
No matter, hotels are of secondary importance these days at Beverly Hills-based Hilton, where lodging is no longer the biggest profit maker. The spotlight now is on Hilton’s fast-growing casino business, and Avansino, a 49-year-old tax lawyer and former Nevada gambling regulator, is leading the worldwide expansion of Hilton’s gambling operations.
Wasting little time, Avansino has reorganized the company into separate hotel and gambling divisions and created a team to find promising gambling opportunities worldwide. Hilton’s recent batch of new and planned gaming ventures range from casino riverboats in New Orleans and Kansas City, Mo., to casino hotels in Turkey and Uruguay.
The explosion has been triggered by cash-strapped governments, which have opened the door to legalized gambling to raise funds. The number of states that permit casino-type gambling has risen from two--New Jersey and Nevada--to 10 during the last decade. Some form of gambling--from lotteries to horse racing--is legal in 48 states.
Hilton is one of many gambling and hotel companies--such as Circus Circus and ITT Sheraton--racing to claim prime locations and sign up exclusive deals, locking up the biggest profits before other rivals appear and begin eating into the market.
“It’s just going to be a mad race,” said William N. Thompson, professor of public administration and gambling expert at the University of Nevada at Las Vegas.
Avansino’s challenge is to exploit the legalization of gambling while protecting Hilton’s Nevada gaming empire from newcomers near and far.
Hilton, which generated more than 60% of operating profits last year through gambling, currently operates five casinos in Nevada as well as gaming properties in Australia and Turkey. The 3,530-room Flamingo Hilton on the Las Vegas Strip is reportedly the single most profitable hotel-casino in the world.
The lodging company’s involvement in gambling dates back to 1947, when the Hilton won approval to operate a hotel-casino in Puerto Rico, which it no longer operates. In 1970, Hilton bought half of a Las Vegas casino--the beginning of the $1 billion the company has poured into the Nevada gambling industry.
When the investment in the Nevada casino was first proposed, “there was a lot of concern on the part of our board . . . . Las Vegas didn’t exactly enjoy the best reputation,” said Chairman Barron Hilton. “In looking back, it was probably one of the best decisions that this company ever made.”
The company’s gambling investment has looked particularly smart in recent years as the hotel industry has remained stuck in a deep slump. Hilton’s 1992 hotel operating profits declined slightly from the previous year while gambling profits soared 33%.
But the gambling business can be highly volatile. At the Las Vegas Hilton, which caters to high rollers, profits soared in 1990 when the house’s win-rate was abnormally high. In 1991, however, the win-rate returned to normal levels, contributing to a $32-million decline in table winnings.
Despite the company’s growth in gambling, Avansino said the company “lacked energy and enthusiasm” as it sought to expand in gambling. Splitting Hilton into gambling and hotels--which, combined, generated about $1.2 billion in revenues last year--permits the company to act quickly on either gambling or hotel issues, he said.
The faster pace of casino development resulted in Hilton speeding the completion of its 2,400-passenger riverboat casino in New Orleans, which will open next spring. The “Queen of New Orleans” will be profitable in the first month, Avansino said.
The New Orleans riverboat, moored next to the New Orleans Hilton, is the model of casino development the company wants to clone across the country: a large gambling complex located in the middle of a metropolitan area.
But such proposals have often created controversy and local opposition. In Chicago, for instance, a consortium that included Hilton lost a bid to develop a lakefront gambling complex after the governor of Illinois vetoed the proposal.
“In order to maintain a good reputation . . . we ought not be trying to pressure some into an industry that maybe some don’t want,” said Avansino, who stopped gambling when he served on the Nevada Gaming Commission.
In the mid-1980s, Hilton’s attempt to expand in Atlantic City, N.J., turned into a costly embarrassment. After beginning construction on a casino-hotel, Hilton was denied a casino license by the New Jersey gambling regulators, citing the company’s ties to a lawyer suspected of links to organized crime. New Jersey officials reversed themselves in 1991, but Hilton said it has no immediate plans to open an Atlantic City casino.
Hilton’s interest in building new casinos is fueled in part by the vulnerability of its Nevada operations. The opening of three new huge, casino-hotel projects in Las Vegas in the coming months--such as the 33-acre MGM Grand, which opens this December--will flood the city with more than 10,000 hotel rooms and dilute the profits of existing casinos.
Hilton expects profits to suffer over the coming months, despite investing more than $250 million to improve and expand its Nevada casinos to keep up with the new competitors.
“Obviously the pie is going to get cut into thinner slices until the extra capacity gets used up,” said gambling industry analyst Marvin Roffman of Roffman Miller Associates in Philadelphia.
A larger and more long-term threat is posed by proposals for casino-type gambling on Indian reservations in California and Arizona. Such operations could siphon off gamblers from Nevada’s single largest source of gamblers: Southern California.
“It’s a serious issue,” said Avansino, who adds Hilton is also exploring opportunities in Indian gaming.
Despite all the attention given to gaming, Hilton, which in the past has considered and rejected spinning off the hotel business, said its casinos and hotels complement each other. Gamblers, Avansino said, tend to “play where they stay,” and Hilton has a worldwide hotel network and reputation to draw customers into its casinos.
The ability to draw out-of-town tourist dollars will help Hilton win over community leaders, Thompson said. “That would be much more persuasive than someone who preys on the locals.”
Gambling for Profits
Gaming surpassed hotels as the biggest source of profits at Hilton Hotels during the past decade.
Operating Profit (in millions of dollars)
Year Hotels Gaming 1983 $101.0 $68.6 1984 $107.8 $69.7 1985 $90.5 $76.4 1986 $83.6 $88.1 1987 $100.7 $107.7 1988 $115.1 $128.6 1989 $129.3 $102.6 1990 $120.6 $130.4 1991 $92.9 $115.0 1992 $ 91.5 $153.4
Source: Hilton Hotels
