Who Will Save Revel? Morgan Stanley Walking Away from Atlantic City Casino

Morgan Stanley has decided to cut its losses in Atlantic City. The Wall Street investment bank says it will be selling its stake in Revel Entertainment Group LLC's Revel casino in Atlantic City, N.J. The investment bank, which had invested $1.2 billion into the project, says it will "take a substantial loss" -- one that is estimated to be somewhere between $800 million to $1 billion.

"At this point, there has been some recovery in the financial market and they can absorb the hit," says Rich Moriarty, a principal with the Las Vegas-based research firm Union Gaming Group. "Morgan is figuring that it's better to walk away and invest elsewhere. The view internally may be that the Atlantic City market will never recover." (Reportedly, the loss will be offset by a recent $775 million legal settlement that fell in Morgan Stanley's favor from an unrelated matter.)

Morgan Stanley's decision comes after the casino said it would require another infusion of cash, something to the tune of $1 billion, in order to build its interior. Kevin DeSanctis, chairman and CEO of Revel, has said that China's Export/Import Bank would potentially put up money, but that has evidently failed to give Morgan Stanley enough peace of mind about the project.

"The indication is that Morgan Stanley does not believe in the project anymore, and I don't think they believe that the money [from China] is coming; otherwise they would wait and let the new investor put his money in," says Randall Fine, managing director of Fine Point Group, a Las Vegas-based gaming consultancy. "It's not rational to invest $1-billion in Atlantic City right now. If you have the billion, and you want to invest in Atlantic City, why not wait and see what happens in Pennsylvania?"

Pennsylvania could indeed pose a threat to Revel and the other casinos of Atlantic City. Gaming was recently legalized in the Keystone State and Steve Wynn is planning to open a casino in Philadelphia, a mere 60 miles from Atlantic City. "If I had a client who could be given Morgan's share of the property for zero dollars in exchange for putting in the billion dollars required to finish it, I would still advise waiting," says Fine.

The Revel's fate is uncertain, but some clues of what may happen to the half-finished casino may be found in the story of the Fountainbleu. The casino, which is in the midst of construction on the Las Vegas Strip, ran out of funding and went into bankruptcy last year. Then bargain-hunting Carl Icahn swooped in and bought the partially-built resort for $156.5 million, a fraction of what had gone into the casino up until that point. "He's mothballing the project and will maintain it on a monthly basis," says Moriarty. "In three- to five-years [when the Vegas climate improves] he can sell it or finish building it."

Moriarty can see a brave investor employing a similar strategy with Revel: "At some point, when you see revenue declines leveling off, and see a return in the market, a project like Revel makes sense." Asked for an estimate of what Morgan can hope to scrape back from its $1.2 billion adventure, Moriarty replies, "Who knows what it will clear at. The market will ultimately define that number, but Morgan Stanley will be getting cents on the dollar."