Joint venture takes best of both worlds

Gary Thompson

Thursday, June 20, 1996 | 11:59 a.m.

The Monte Carlo hotel-casino has already surprised a lot of people.

When it opens to the public early Friday, it will surprise a lot more with its eclectic combination of economy prices and elegant decor.

It shouldn't.

Mirage Resorts Inc. and Circus Circus Enterprises Inc., co-owners of the new resort, are known as two of the shrewdest operators in the gaming business.

Mirage bespeaks elegance, Circus value. It stands to reason that their first joint venture should reflect the strengths of both companies.

Yet the finished product has pleasantly shocked visitors during preview walk-throughs over the past several weeks.

* "The elegance of Monte Carlo really amazed me," says David Anders, an analyst with Raymond James & Associates. "The attention to detail was way above the usual Circus Circus quality. It offers one of the best hotel values on the Strip."

* "It's a wonderful project," says Jason Ader of Bear Sterns & Co. "I was really impressed by it."

* "I think the Monte Carlo offers great room values," says Joseph Coccimiglio of Dean Witter Reynolds Inc. "What you get as a guest in those rooms will create a lot of demand for that property. It'll be a great value and attract value-driven consumers."

What's got them buzzing most is the the foresight of Mirage Resorts in ceding control over a valuable Strip property and the performance of the Circus Circus management team that has operational control of the resort. Though the companies will split profits equally, Circus is calling the shots.

With Monte Carlo, Circus executives have stretched their imaginations and construction dollars to develop what financial analysts expect to be one of the best-performing resorts in Las Vegas.

"They're projected to do $70 million in annual cash flow on average daily room rates below $70," Ader says. "I think they can ultimately do twice that."

"I originally thought Monte Carlo would throw off $16 million a year in net income to each company," Coccimiglio says. "But I believe my room-rate assumptions may be conservative because demand for those rooms has been very strong. I don't think $40 million a year total is out of reach."

Anders concurs, saying $40 million total net is "a reasonable estimate." Mirage Resorts Chairman Steve Wynn is more bullish, telling shareholders recently he expects his company alone to earn $25 million to $40 million a year from Monte Carlo.

That would equate to a yearly net of $50 million to $80 million, an amazing return for an investment totaling about $350 million -- most of it debt. Yet it illustrates what can happen when experienced gaming competitors cooperate to turn a vision into a reality.

It began in 1993 when Mirage bought the Dunes hotel-casino, which sat on 164 acres along the Strip between Flamingo Road and Tropicana Avenue. The price was about $427,000 an acre, or $70 million total -- an extraordinary bargain considering the prime location.

Wynn and his top executives began planning Mirage's most ambitious project, which evolved into the ultra-swank Bellagio -- a $1.3 billion resort he promises will feature the most luxurious hotel in the world.

Meanwhile, Gold Strike Resorts -- a private company made up of former Circus Circus executives who'd left in a management dispute in 1993 -- was looking to expand. Gold Strike operated casinos in Jean and Henderson and was developing gaming projects in Mississippi and Illinois.

Gold Strike principal Glenn Schaeffer approached his friend Dan Lee, Mirage's chief financial officer, about building a resort on a portion of the Dunes site.

"It was right in the heart of the Strip and between the two busiest corners of the gaming industry, not just in Las Vegas but in the world," Schaeffer says. "We believed it would be a powerful location for a resort destination.

"It was our belief that Gold Strike could be a front-rank player in the gaming industry, but we needed a world-class Strip resort to do it. The best location available to us was the one controlled by Mirage.

"This was enhanced by our understanding of Mirage's plan to develop Bellagio. We knew the fanciest resort in the world would be a great neighbor, especially with a monorail connecting the two resorts that could funnel customers through the Monte Carlo."

Skeptical at first, Wynn became convinced after Lee outlined the profit potential of a joint venture with Gold Strike. "He said we could get $20 million to $25 million every year like clockwork without doing anything," Wynn explained at the time. "That makes this the best investment I ever saw."

Mirage agreed to put up 44 acres, which it valued at $47 million, and up to $20 million in cash. Gold Strike agreed to contribute up to $67 million in cash, equaling Mirage's equity investment.

The remainder of the $344 million budgeted for the project came from a $210 million credit facility, $200 million of which is a first-mortgage, nonrecourse bank loan.

"It was a brilliant move on Wynn's part," Ader says. "He put up the land and a little bit of money, and Mirage gets half the profits."

"We were in the midst of developing Bellagio, and we can't do two or three of those at once," recalled Mirage Resorts Vice President Alan Feldman. "Glenn Schaeffer had just joined Gold Strike and gave the management team there unusual depth. They run an incredibly tight business, are very well organized and know their market extremely well."

Then, in mid-1995, Circus Circus Chairman Clyde Turner, a former Mirage Resorts financial officer, bought Gold Strike for about $600 million -- all but $12 million of it in Circus stock. With it came that management team that had so impressed Mirage executives.

It also impressed Wall Street. The purchase re-energized the slumbering gaming giant whose stock price had slumped 50 percent in a year. With Schaeffer, Mike Ensign and William Richardson back in the fold, Circus stock started to climb. Today, it's about doubled in price since the purchase.

"When Gold Strike was taken over by Circus Circus, the situation got even better," Feldman noted. "There were no two companies that understood that mid-market side of the business better than Circus and Gold Strike."

The buyout gave Circus a 50 percent stake in the Monte Carlo, whose 19th century French architectural design and understated elegance seemed destined to appeal to a more upscale clientele than the company's traditional market.

Yet the initial daily room rates -- $60 weekdays, $100 weekends -- were set to help fill Monte Carlo's rooms with middle Americans without giving them sticker shock.

"We need to establish a base by filling the rooms with the right people -- leisure travelers as well as rated players -- and encourage repeat business by offering a great product," says Vince Matthews, Monte Carlo's general manager.

It seems certain, though, that those rates won't last for long. Monte Carlo opens sold out for the next three months. As more and more visitors see the values firsthand, the law of supply and demand is bound to pressure prices.

Mirage will add impetus to any increases when Bellagio opens in early 1998. Catering to the high-end market -- travelers accustomed to the amenities, and costs, of the world's greatest hotels -- Bellagio will price rooms at $250 or more. That will allow neighbors such as Monte Carlo to narrow the spread, though it won't change Circus' marketing strategy.

"Our demographic target is still the visitor 25 to 55 years old earning $40,000 or more a year," says Tony Alamo, the Circus executive who oversees operations at Monte Carlo, Luxor, Excalibur and the Hacienda. "Monte Carlo fits right into the Circus family, though it's a little more upscale."

"We'll be the value leader for the highest-priced location on the Strip," Schaeffer says. "We are going to be a high-quality vacation experience for the discerning customer."

He acknowledges room rates will rise. "Given the location, quality and product, we have room for higher pricing as time goes by."

That's one of the things that most impresses Wall Street.

"What they've done is build up a critical mass of entertainment superstore product on the site that will raise the value of that location greatly," says Ader.

That bodes well for future deals involving the two companies, such as their already announced plans to build neighboring resorts in Atlantic City.

It also demonstrates the ability of the partners to alter their traditional marketing strategy to profit from new opportunities. And it shows, once again, that both know how to maximize the value of their already extraordinary holdings.

"This is the first opportunity for the new Circus management team to showcase their potential," Ader says. "This will have a big impact on Project Millenium" -- the Circus plan to build four new resorts south of the Luxor resort on the Strip.

The centerpiece will be a $500 million-plus casino resort with up to 4,000 rooms on the site of the Hacienda hotel-casino, which will be razed this year.

The project replacing the Hacienda is expected to have average room rates of $100 a night -- higher than its other Las Vegas properties normally charge.

And this week, Circus and Toronto-based Four Seasons resorts announced a joint venture to build a luxury 400-room hotel nearby.

All told, Circus expects to spend $1.5 billion by the end of the decade developing the properties stretching south to Russell Road.

"They know public perception of their ability to move up will be influenced by what they've done with the Monte Carlo," Ader says.

"This shows that Circus and Mirage have the ability to work together and can produce a plan that Steve Wynn is happy with," says Andrew Zarnett of Ladenburg, Thalmann & Co.

"For Circus, it indicates an ability to do something of a different dimension, which is a positive for them."

"What's encouraging is that this was developed by the new management of Circus Circus and shows what they can do without the old guard looking over their shoulders," Anders says. "They can now pay greater attention to detail, and it shows."

It's rare that financial analysts who closely study the gaming scene are surprised by the companies they follow. But it indicates how far ahead of the curve Mirage and Circus management may be.

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