Adelson courts controversy in bid to outstrip other resorts

Gary Thompson

Tuesday, May 4, 1999 | 9:27 a.m.

The Venetian entered the fray today.

For many, the question is "Why?"

Why now, when the resort is still a work in progress, when hard hats seem more fitting than top hats, when no retail shops, only a handful of restaurants and just a few floors of rooms are ready, when the firm overseeing construction of the Venetian would prefer to wait until late June to certify its work is done?

Let Venetian owner Sheldon Adelson explain:

"Why not open now?" answers the combative billionaire, adjusting his hard hat as he leads a group of reporters on a tour of the resort's unfinished retail shopping area. "The hotel-casino is ready."

"In a month, everybody will forget the 'soft' opening because this is the most gorgeous property on the Strip," Adelson says, rejecting any comparisons with the Stratosphere Tower's ill-fated soft opening a few years ago.

"Why forgo the income? If it was your money and you were paying all the staff and some of the place was ready, would you wait?"

Others might. Construction of Bellagio and Mandalay Bay were delayed, but they weren't owned by Sheldon Adelson, whose $1.5 billion Renaissance Venice-themed, all-suites hotel-casino is more than just the latest of the largest wave of resort openings ever to hit Las Vegas.

It also represents Adelson's bid to outshine the works of Las Vegas' reigning resort superstars, master hotel-casino builders and buyers such as Steve Wynn, Kirk Kerkorian, Arthur Goldberg and Mike Ensign.

Remaking the skyline

Adelson isn't content simply to join their ranks, not by a long shot. He wants to be the leader of the pack, remaking not only the Las Vegas skyline but also the way business is done in this tourism-based city.

And make no mistake: Adelson is doing it his way.

Most people building their first gaming megaresort would find it challenging enough simply to erect 3,036 hotel suites in the middle of the biggest room expansion in Las Vegas history and fill them with conventioneers, a customer segment once viewed with disdain by casino operators.

But not Adelson, who courts controversy the way Romeo wooed Juliet. He isn't trying to smooth the process by currying favor with powerful political and economic allies whose support other resort builders traditionally seek.

Instead, he's locking horns with the Las Vegas Convention and Visitors Authority, whose mission is to bring more convention business to town; with the Culinary Union, which plans to throw up picket lines around the Venetian, and with local officials who hold licensing powers over the resort.

He's threatened lawsuits that could cost Clark County taxpayers hundreds of millions of dollars, and is even fighting with Lehrer McGovern Bovis Inc., the company that's managing construction of his billion-dollar baby.

And while work on the Venetian won't be completed until later this year, Adelson is already gearing up for the start of construction on the Lido, the second phase of the massive resort development on 44 acres along the Strip.

But the Boston cabdriver's son who built his own billion-dollar convention and travel empire remains supremely confident that his vision, daring and financial clout will make the Venetian complex an aesthetic and economic success.

Most who've seen it agree the Venetian's appealing architecture and elegant decor make for a beautiful structure that replicates romantic scenes from Renaissance Venice, replete with arched bridges, flowing canals, open vistas, alluring niches, shops, restaurants and unique landmarks such as the Doge's Palace and the Campanile Tower.

The lobby, with its 65-foot domed ceiling, is decorated with ornate Venetian-themed fresco-styled paintings. The ornamental columns and three-dimensional-style floors found in Venetian palaces add a distinctive look to the barrel-vaulted main passageways.

Most of the hotel's common areas are completed, but there's still an enormous amount of work to be done in the 475,000 square feet of net leasable restaurant, retail and entertainment space, which Adelson says will ultimately contain 15 restaurants and 78 retail outlets.

Venetian President William Weidner says the outdoor swimming complex featuring five pools is expected to be ready by mid-May. It will be surrounded by gardens, waterways, fountains and sculptures.

The resort's half million-square-foot Congress Center, a critical component of the Venetian's marketing strategy, is hosting a Blockbuster Video convention with 6,000 delegates, but most were lodging in nearby resorts because only the third through sixth floors of the hotel tower were cleared for occupancy as of early this morning.

In developing the resort, Adelson set out to create a "must-see" destination on a premium Strip location that uses its all-suites accommodations and links to the Adelson-owned Sands Expo & Convention Center and the Venetian's Congress Center to draw a higher-budget customer mix.

He wanted to target premium gaming customers, as well, though he doesn't want to go after "the known top 50 to 100 baccarat players in the world in order to avoid the risks associated with the amounts wagered by these players," according to documents filed by a Venetian affiliate with the Securities & Exchange Commission.

The strategy hinges on Adelson's belief the resort can draw free-spending convention business during traditionally slow midweek periods, and remain full on weekends with free and independent travelers (FITs) willing to pay a premium for its luxurious suites.

Those suites, each almost twice as large as the standard Strip hotel room, feature sunken living rooms, marble bathrooms, mini-bars, fax, copier and computer-printer capabilities, three two-line telephones and other amenities favored by higher-budget business and FITs.

1.65 million square feet

Together, the Congress Center's and Sands Expo Center offer 1.65 million square feet of meeting space and should enable the complex to compete with the Las Vegas Convention Center and the new MGM Grand Inc. convention facility.

And compete it will. In its SEC filings, the Venetian's parent company, Las Vegas Sands Inc., says "the Las Vegas Convention Center is expected to remain the primary competitor to the Expo Center."

In fact, the LVCVA's plan for a 1 million-square-foot expansion of its facilities has so infuriated Adelson he has vowed to sue the LVCVA for "predatory pricing policies."

The crux of the dispute lies in what the competitors charge for space. Exhibitors staging trade shows at the Las Vegas Convention Center pay about one-third of what the Sands Expo Center charges.

Adelson contends the LVCVA expansion plan is part of "a conspiracy to steal business from me" and "exposes the county to a lawsuit from us for hundreds of millions of dollars."

But LVCVA President Manny Cortez says Adelson wants to force conventions and trade shows to exhibit at the Sands Expo Center, which charges "the highest rates in the country."

There has also been speculation that, by delaying the Las Vegas Convention Center expansion, Adelson hopes to force exhibitors to sign long-term deals with the Sands Expo Center and the Venetian Congress Center.

By providing a predictable revenue source, such contracts could help Adelson raise the money needed to begin construction of the Lido.

The SEC filing says that while trade show and convention promoters "will be under no obligation to select the Venetian as the headquarters hotel for their events," the Sands Expo Center will "use commercially reasonable efforts" to accomplish that.

"There's certainly a desire to have promoters reserve rooms at the Venetian," Weidner says, "but there is no requirement."

Adelson has also pressured Lehrer McGovern Bovis, rejecting the construction management firm's request to delay the Venetian's opening until June and asserting that LMB's concerns about overtime and other costs were unwarranted.

LMB had guaranteed the resort would be "substantially complete" by mid-April, and faced financial penalties for any delays. Adelson has declined to rule out a lawsuit against LMB for revenues lost due to the late opening.

LMB is supposed to start construction of the 3,036-suite Lido later this summer. The Lido is expected to cost about $1 billion, including an equity contribution from Adelson and issuance of debt.

Ultimately, Adelson plans to sell stock in the complex, though not any time soon. "Sheldon may do an initial public offering closer to or after the opening of Phase 2, so the investment community can see the power of these two properties working together," Weidner says.

If completed, the Lido would swell the Venetian complex's room count above 6,000, making it the largest hotel-casino resort in the world. But even without the second phase, the Venetian itself is part of resort explosion that will add 10,000 rooms to the Strip's inventory this year alone and swell the Las Vegas market's total to 121,000 from 109,500 by year-end.

The recently opened Bellagio and Mandalay Bay have sparked an upsurge in visitor volume, which fueled rising room rates and climbing casino win figures.

If sustained, those trends bode well for the Venetian, which set aggressive financial targets when it began the debt-financing process that's expected to peak just above $930 million.

At a blended rate of 11.1 percent, the debt will require interest payments of $103.2 million a year, or about $283,000 a day. Tack on estimated operating expenses of $346.7 million annually and the Venetian will have to generate $1.2 million a day in net revenue to break even.

$527 million projected

Adelson's financial forecast projects net revenue at $527.8 million for the first full year of operations. It assumes the 3,036-suite resort will record a 93 percent occupancy rate and an average daily room rate (ADR) of $167.

The financial forecast also projects casino revenue at $280.5 million annually, including a daily slot win of $151 per machine and a daily table game win of $2,463 from its nonbaccarat table games.

Another uncertainty is what might result from any potential Culinary Union opposition to the Venetian's recruiting and employment programs. The union wants the resort to recognize it as the bargaining agent for future employees, while Adelson wants the workers to make their own choices on union representation.

Weidner also says he and Adelson believe the revenue projections are attainable. And he points to the complex, multi-layered structure of the Venetian's business plan and the resort owner's related business experiences as reasons for that confidence.

Adelson created COMDEX, the world's largest trade show, and ran it for years before selling it in 1995 for nearly $900 million. The former owner of Tristar Airlines, Adelson also operates GWV, the Northeast's biggest tour wholesaler.

Adelson bought the Sands in 1989 from MGM Grand Inc. and built a 1.15 million square-foot Sands Expo & Convention Center in the back of the 63-acre site. As time progressed, he decided to raze the aging Sands and replace it with a new, themed resort, settling on Venice after honeymooning there with his wife, Miriam.

In planning the new resort, Adelson joined a handful of other casino owners who'd concluded Las Vegas could no longer continue to grow solely by offering low-cost rooms and inexpensive buffets to inveterate gamblers. He believed the market's future depended on attracting a new breed of customers.

His experiences convinced him the convention and trade-show business was an underserved niche in the Las Vegas market. He saw an opportunity to build an all-suites hotel that would cater conventioneers during slow midweek periods and draw tourists and gamblers on weekends.

But Adelson decided to hedge his bets, theorizing he'd get more return and run less risk if he "outsourced" key parts of the resort, such as restaurants, retail, entertainment and even the heating and air-conditioning.

The latter facility, for example, is being built at a cost of $67 million by Atlantic-Pacific Las Vegas LLC, a joint venture formed by subsidiaries of the utility holding companies Atlantic Energy Inc. and Pacific Enterprises.

The venture will sell heating, ventilation and air-conditioning services to the Venetian and its various affiliates, as well as to each independently owned restaurant, retail outlet and entertainment providers.

Adelson also opted against operating restaurants. The Venetian will offer room-service food and banquets to its customers, but all other food outlets will be leased and operated independently, as will retail shops in the resort's 500,000-square-foot mall.

In theory, the result would add value to the investment of Adelson and his creditors. Adelson himself put up $95.3 million in cash and contributed 45 acres with an appraised value of $225 million to the project.

His total investment of $320.5 million, coupled with the projected debt, would raise the project's cost to $1.25 billion. And with the retailers, restaurateurs and entertainment providers adding an estimated $300 million of their own to finish off their leased spaces, the Venetian's final cost would exceed $1.5 billion.

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