Tropicana Entertainment Facing Risk from Labor Dispute

On February 8, 2012, Tropicana Entertainment, Inc. disclosed that the company was seeking to refinance its bankruptcy exit facility loan.1 The companys presentation to lenders did not mention that managers are provoking a labor dispute at its highest grossing casino. On February 3, Tropicanas Atlantic City managers declared that they would not bargain any further with their employees, whose contract expired last September. The Associated Press reported Tropicana Atlantic Citys GM Tony Rodio said, The casino is prepared to withstand a strike if thats what it comes to.2 Prospective creditors and investors should consider the impact of labor unrest at the Atlantic City property on the financial health of Tropicana Entertainment. Tropicana Entertainment depends on its Atlantic City casino for 45% of its revenue.3 In October 2004 workers at seven casinos in Atlantic City went on strike. That month the struck casinos saw revenue decline 9.8%, while revenue at the casinos without a labor dispute saw revenue increase 21.2%. Most Atlantic City casinos have settled their labor contract. Of the three casinos that have not settled, only Tropicana Atlantic City has refused to continue bargaining. The New Jersey Policemens Benevolent Association is asking its members to boycott the Tropicana while in Atlantic City in March 2012 for their spring convention. In October, the New Jersey Education Association asked members attending a statewide meeting at the Atlantic City Convention Center to cancel hotel room reservations at the Tropicana. Many of the conventions held in Atlantic City are union groups and state groups that tend to support workers in labor disputes. Tropicana Entertainment listed conference room nights booked by union groups including the UAW, AFL-CIO, and New York Fire Department in its presentation to lenders.

Read on for a more detailed analysis, and visit www.TropLoanExposed.org for updates as the contract dispute continues. Recovery at Tropicana Entertainment Threatened by Atlantic City Labor Dispute Tropicana Entertainment saw earnings improvement in 2011. The company generated EBITDA of $35 million in 3Q11, a 35% increase from 3Q10.4 However continued recovery depends in large part on

TPCA 8K. Filed February 8, 2012. Trop declares contract impasse, Associated Press, February 3, 2012. 3 based on LTM ending September 30, 2011. TPCA 8K. Filed February 8, 2012. 4 Imperial Capital. Gregg M. Klein. Tropicana Entertainment, Inc. November 14, 2011.
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increased revenue at the Tropicana Atlantic City property, a casino where workers and management have not agreed to a new contract. In November, Gregg Klein of Imperial Capital gave Tropicana Entertainment a stock price target of $22, 35% above the current price.5 The outperform rating was based in part on expected improvement at the Atlantic City property. Writing about the Atlantic City property Klein noted, The new management team has made multiple changes, which have led to improved casino revenues in recent months. The facility has some amenities that, combined with effective marketing, we believe should appeal to customers. In addition, EBITDA margins improved by roughly 330bp in 3Q11, a trend that we expect to continue. We believe this casino has the potential to generate around $50mn of annual EBITDA, a significant improvement from the current $28mn.6 With nearly half Tropicana Entertainments revenue coming from Atlantic City, continued recovery depends on the performance of Tropicana Atlantic City. The largest of the companys eight properties and the only one in major gaming market, Tropicana Atlantic City generated 44.4% of Tropicana Entertainments revenue in the nine months ending September 30, 2011.7 In 3Q11, the Atlantic City property represented 49% of the Tropicana Entertainments revenue and 48% of operating income.8 Labor Contracts Are Settled at Most Atlantic City Casinos: Tropicana Atlantic City Remains at Risk.

Figure 1: Contract Status by Market Share

(as % of Total GGR)

Under Contract 83%

Risk of Labor Dispute 17%

Labor contracts covering employees at 10 of Atlantic Citys 11 casinos expired on September 15.9 UNITE HERE Local 54, which represents hospitality workers including housekeepers, servers, and cooks, reached an agreement with management at seven of the casinos: four owned by Caesars Entertainment, two owned by Trump Entertainment, and the Golden Nugget. Workers have ratified all seven contracts.

5 6

Imperial Capital. Gregg M. Klein. Tropicana Entertainment, Inc. November 14, 2011. Imperial Capital. Gregg M. Klein. Tropicana Entertainment, Inc. November 14, 2011. 7 TPCA 3Q 2011. 10Q. 8 TPCA 3Q 2011. 10Q 9 The Borgata Hotel Casino & Spas contract expires in 2012.

The casinos that have settled their contract dispute include the largest revenue producers in Atlantic City. The seven casinos that recently settled together with Boyd Gamings Borgata (contract expires 2012) comprise 83% of the market share as measured by 2011 gross gaming revenue. Among the casinos at risk for a labor dispute, Tropicana Atlantic City is the strongest producer of revenue and most comparable to the casinos that have settled. Tropicana has 8% of the market share, while Resorts has 5% and ACH has 4%. Impact of the 2004 City-wide Strike in Atlantic City In October of 2004, after Local 54 and several casino companies failed to reach an agreement during contract negotiations, approximately 10,000 members of Local 54 went on strike against seven of the casinos in Atlantic City. The strike lasted 34 days, including the entire month of October.

Figure 2: October Gaming GGR at Struck Casinos

(in $ millions) $245 $240 $235 $230 $225 $220 $215 $210 $205 $200 $195 1999 2000 2001 2002 2003

10%

2004

For the month of October, the seven struck casinos saw gaming revenue decline by $23.2 million or 9.8% (the casinos that were not affected by the strike saw revenue increases of $30.6 million or 21.2%). October 2004 was a favorable month with 10 weekend days versus only 8 in 2003. It is noteworthy that gaming revenues for the month of the strike were lower than in the first full month following the terrorist attacks of September 11, 2001. Given the impact of the strike on gaming revenues, investors should wonder what the effects of a prolonged labor dispute with Local 54 would do to Tropicanas revenues. Workers do not need to strike to impact Tropicanas revenues significantly: for example, their union can run a boycott and they are legally entitled to picket before and after work and on breaks.

Customer Loyalty to Atlantic City Casino Workers The Atlantic City gaming market is supported by regular customers. Atlantic City is a drive-in market, with 70% of visitors traveling by car and nearly 28% by bus.10 Most customers come for the day and many visit regularly. Among the 80% of customers who primarily come to Atlantic City to gamble, the median number of annual visits is 12 and customers typically visit just one or two casinos per trip. The majority of customers live within 3 hours of Atlantic City, and the median stay is 8 hours in length. Nearly 64% are female and the median age is 56. In this context, regular customers get to know the casino workers. A bellman at the Tropicana explains, Most of the regulars we see are high rollers. They tend to be middle age and older, male and female. They say things to me like, Yeah I've lost, but I wouldn't go anywhere else because you guys make it a great experience. A server at the Tropicana for more than two decades describes her customers: We have a lot of regulars, people who come in every day. Most of them are retirees, and they know us by name. We know what they drink, so I'll ask a regular, Do you want a coffee, light cream, two sugars? and it makes them feel like they are in a place where they are known and someone cares about them. Another cocktail server describes a relationship with one of her customers, I have a regular who comes in every day. He has to be in his 90s. I've known him for years last year he had a stroke. He's not supposed to have much to drink. I look out for him. I make sure that he only gets one drink. And I've told all the other cocktail waitresses to make sure he doesn't get anymoreHe doesn't object, because he knows that I'm taking care of him.

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Atlantic City Visitor Profile 2008. Prepared for the Atlantic City Convention and Visitors Center.

Many of the conventions and meetings held in Atlantic City are union groups and state groups that tend to be supportive of workers in labor disputes. Tropicana Entertainments presentation to lenders the company enjoys ample Conference room nights with large organizations and companies naming the UAW, AFL-CIO, New York Firefighters, and highly unionized New Jersey public safety groups. These are all organizations that might be concerned to hear that Tropicana management provoked a labor dispute. The Press of Atlantic City reported on February 14 that the New Jersey Policemens Benevolent Association is asking its members to boycott the Tropicana while in Atlantic City next month for their spring convention. In October, the New Jersey Education Association sent a letter to its members attending a statewide meeting at the Atlantic City Convention Center urging them to cancel hotel room reservations at the Tropicana and rebook at other Atlantic City properties. The letter described the Tropicana negotiations with Local 54 as particularly disturbing because management proposals at this property would eliminate subcontracting protections and employee pensions entirely. In San Francisco, where Local 54s affiliate union, UNITE HERE Local 2 has been involved in lengthy labor disputes at multiple hotels, the Hotel Council has attributed lost convention business to the unsettled labor disputes. More than half a million dollars thats what the City of San Francisco has lost in just three months as a result of events being moved out of San Francisco or canceled altogether, said Sam Singer, a spokesman for the Hotel Council of San Francisco speaking about a three month period ending in February 2010. In that quarter, the Hotel Council attributed $5.5 million in lost tourist revenue to the dispute. In a year of massive deficits and drastic budget cuts, the city cannot afford these kinds of tax losses, said Singer.11

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http://www.sfhotelnews.org/2010/03/press-release-san-francisco-loses-5-5-million-tourist-business-citygeneral-fund-540000-poorer-due-unite-local-2/