Detroit Union Claims Activist Hedge Fund Investors Pose Risk to Casino Workers, Revenue
Posted on: May 21, 2019, 05:08h.
Last updated on: May 21, 2019, 05:08h.
A Detroit local of Unite Here is the latest labor union to warn regulators about risks from activist hedge funds and private equity firms which invest in large casino companies and how it may hurt worker job security.
On Tuesday, four officials of the union’s Local 24 — which represents Detroit-area gaming venue employees — during a public meeting cautioned members of the Michigan Gaming Control Board on the priorities of activist shareholders. None of the board members discussed the union’s statements, according to board spokeswoman Mary Kay Bean.
Earlier in the day, the union released a statement saying it is trying to protect jobs and tax revenue generated from casino proceeds. In Detroit, three casinos received about $1.4 billion in total adjusted gross receipts during last year, according to The Associated Press, and Detroit received a cut of more than $182 million in taxes.
Last month, Unite Here also cautioned gambling regulators in New Jersey, Nevada and Ohio about financial firms’ roles as owners or investors in gaming venues.
Experts Disagree on Hedge Funds
J.B. Heaton, an attorney and consultant, who has written extensively on hedge funds, told Casino.org, concerns arise “with hedge funds that are ‘activists’ — because the evidence shows that such funds tend to encourage sales of the companies they invest in as a means of maximizing the short-term share price gains.”
If the buyer overpays in such deals, “it can lead the company — here a casino operator — in a much weaker financial condition, unable to maintain wage contracts and invest in a competitive environment,” Heaton added.
But Douglas Walker, an economics professor at the College of Charleston and who has written extensively on the impact of legalized gambling, told Casino.org, “It’s not obvious … why anyone should care” who owns the venues.
“I wouldn’t expect that who owns a casino should have much of an impact on the day-to-day operations, as owners should still want management to provide a quality experience for customers regardless,” Walker said. He adds that it “seems like there might be a political angle to it.”
While hedge funds can invest in casino companies, like any other investors, Heaton warns that activist hedge funds “add no real value except encouraging the sale of the companies they invest in.”
“That sale can be great for the selling shareholders, but bad for the company, especially when buyers overpay and then are financially weak after the deal,” he added.
Financial firms often are drawn to casino companies as investments. Last year, HG Vora Capital got a 14.9 percent stake in Caesars Entertainment, followed by Starboard Value investing $500 million in MGM Resorts, the New York Post reported.
Starboard Value was co-founded by Jeffrey Smith. In the restaurant sector, Smith took effective control of Darden Restaurants, the owner of Olive Garden and Longhorn Steakhouse — while owning less than 10 percent of the company, Fortune magazine reported.
HG Vora has an activist position in MGM Resorts, too, and other hedge funds are investors, as well. It was reported in September Starboard wants MGM to sell its Macau operating unit, which owns two integrated resorts in the Chinese enclave.
Smith’s hedge fund also seeks MGM and its real estate investment trust (REIT), MGM Growth Properties, to merge with VICI Properties. VICI is Caesars’ REIT.
Icahn Pressures Caesars
Also, in February, billionaire Carl Icahn said in a Securities and Exchange Commission filing that his 9.8 percent stake in Caesars Entertainment Corporation would be better served if the casino operator sold the company.
Caesars is a private equity fund story more than a hedge fund story, per se, but many viewed the private equity owner as effectively looting the company after acquisition,” Heaton explained. “Carl Icahn’s latest moves to encourage Caesars to sell itself is typical [and] Icahn is an interesting case because he often seeks to have companies he owns sell out to potentially-overpaying buyers, while guarding against overvalued acquisitions by his own companies.”
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