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Rod Smith

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British Government Deals Losing Hand to Harrah's, MGM Mirage

17 Nov 2004

By Rod Smith

Harrah's Entertainment and MGM Mirage emerged as losers Tuesday when the British government announced its initial plans for the deregulation of gaming in the United Kingdom, Wall Street analysts said.

The British government has been debating the so-called Gambling Bill, which would legalize Las Vegas-style gambling with unlimited slot machines jackpots.

But under a new "pilot scheme," Britain will limit the initial number of casinos to eight and study the effect of the regional casinos on problem gambling and their economic benefits.

Harrah's, MGM Mirage and Kerzner International have all taken steps to develop megacasinos in the United Kingdom once it liberalizes its gaming laws. Caesars Entertainment has also moved to develop casinos in England, but it is being sold to Harrah's.

Harrah's declined to comment and MGM Mirage officials could not be reached for comment Tuesday.

"Of the American operators interested in Britain, only Kerzner International holds a winning hand," Bear, Stearns & Co. analyst Mark Abramson said in an advisory to investors.

London-based Merrill Lynch analyst Ian Rennardson said in an investor note it is difficult to assess the likely effect of the proposals because they remain mired in confusion and face substantial opposition in Parliament.

Deutsche Bank analyst Marc Falcone was equally guarded, saying it is too early to tell which projects or whether any U.S. operators will ultimately be chosen for the initial round of regional casinos.

However, he said that Tuesday's announcement is bad news for those American operators whose development plans become stalled in the new regulations.

Abramson also warned that whatever benefits materialize will not be realized any time soon.

"Although the time period for the pilot scheme is yet to be specified, we believe that it could be in excess of seven years after the opening of a regional casino (probably in 2007)," Abramson said.

Harrah's plans for a joint venture with Gala Group is jeopardized by the newly announced caps because it called for eight to 10 large casinos around the United Kingdom, resembling the type of properties operated by the company in the Midwest, he said.

"It seems unlikely that many of these will be successfully completed. Harrah's had already stepped back from their previous plans to develop a small number of large casinos outside this joint venture on their own," Abramson said.

MGM Mirage's plans could also fall prey to the new policy because of its emphasis on underwriting economic development, he said.

"We continue to have doubts about the 'economic regeneration' characteristics of the Earls Court project in London. And we now believe the likelihood of project completion is even lower," Abramson said.

Among U.S. operators, only Kerzner is likely to reap added benefits because of its role in the Millennium Dome and Glasgow, Scotland, casino gambling projects, he said.

"Over the long-term, the limitation of licenses is a net positive for Kerzner as it will reduce the amount of competition in the market (in London, in particular)," Abramson said.

Deutsche Bank estimated the U.K. market is expected to add 15,000 slot machines to 20,000 slot machines in the pilot phase of deregulation, down from 30,000 slot machines to 45,000 slot machines.

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