Las Vegas Sun

March 29, 2024

London-based partner injects another $60 million into Aladdin

London Clubs International plc, the London-based minority partner in the Aladdin hotel-casino, is increasing its stake in the Strip project to 40 percent -- and has gained majority control of its board of directors.

The move may be more symbolic than anything else, however, since a "supermajority" vote of 80 percent is required for board decisions. But it will entitle London Clubs to receive the first $30 million in profits produced by the Aladdin each year, a far greater portion than originally expected.

LCI's equity increase, disclosed in the Aladdin's annual report, comes after the project's majority shareholder, a real estate trust held by billionaire developer Jack Sommer, refused an Aladdin request for $36.2 million in additional funding last month.

Under its obligations with the Aladdin's lenders, LCI was compelled to supply the entire amount, along with an additional $24.2 million in cash and credit. The funds were needed to cover additional construction and preopening costs caused by the delay of the Aladdin's opening from April until August.

When LCI, operator of seven London casinos, sold one Monday for about $22 million, the London business press buzzed with speculation that the sale was to help fund LCI's growing Aladdin investment, which is nearing $200 million.

"We have an obligation to the banks, and it's an obligation we've fulfilled," said Bill Timmins, president and chief operating officer of the hotel-casino and a top executive with LCI. "We have a commitment as a company ... to finish this project, and we intend to do that."

One big reason for the sale, Timmins said, was a "change in the gaming tax structure" in England.

"It was time to, shall we say, reduce our holdings in London," Timmins said.

But he added the Aladdin was also somewhat behind the sale, "because we've had to fund a substantial part of it. (Proceeds) will go toward completing the Aladdin."

"The thing that has caused us most disappointment is that our partner has refused to come up with additional funds," Alan Goodenough, an Aladdin director, told the Daily Telegraph newspaper. "We've had to come up with a lot of money for the Aladdin and we're rationalizing where appropriate."

But a spokesman for the Sommer Trust said relations remain friendly.

"The trust enjoys a cordial relationship with the London Clubs," the spokesman said. "That's reflected by the fact that every decision of the board that has been made so far has been unanimous."

The Aladdin, a $1.4 billion, Arabian Nights-themed resort, is scheduled to open Aug. 17. Aladdin officials are optimistic they'll be able to meet that schedule.

The project will include Desert Passage, a $250 million, 500,000-square-foot upscale mall, built as a joint venture between Sommer and Toronto-based TrizecHahn Corp. The mall, with 130 shops and 14 restaurants, is 90 percent leased, and will include such outlets as bebe, Cutter & Buck, Eddie Bauer, Paris jeweler Clio Blue, New York eatery Blue Note Jazz Club and New Orleans restaurant Commander's Place.

LCI's heavy investing comes against a backdrop of uncertainty about the resort's prospects. Park Place Entertainment Corp. took advantage of this uncertainty to build an estimated one-third stake in the Aladdin's outstanding bonds. If the resort hit financial difficulty, Park Place could use a majority position in the bonds to take over the Aladdin.

"I don't know if they'll complete it or not," Park Place Chief Executive Arthur Goldberg told investors in February. "And if it gets done, I don't know where they're going to get the capital to operate it."

More than 30 mechanics liens have also been filed against the resort over the past two years, but Richard Goeglein, president and chief executive of the resort's parent company, called these "very typical for a job of this complexity."

"It's never been an issue with the property," Geoglein said. "Before we're allowed to draw down money, (liens) have to be cleared or bonded around."

The resort's increasing reliance on LCI's pocketbook is an issue of the Sommer Trust's liquidity, rather than financial troubles, Aladdin officials said.

When LCI reached a pact with the Sommer Trust in 1998 to develop the Aladdin, LCI started with 25 percent ownership in the project in exchange for a $50 million investment. At the time, the estimated cost of the Aladdin was $826 million.

In order to secure bank financing for the Aladdin, the companies entered into an obligation to complete the Aladdin regardless of additional cost. Under this agreement, the Sommer Trust would provide 75 percent of all additional costs, with the remaining needs being covered by LCI.

"The Sommer trust is a private real estate trust," Goeglein said. "Historically ... they indicated they would do whatever they could to liquidate some of those holdings."

But that didn't turn out to be the case. From February 1998 to this March, the budget of the Aladdin rose to $913 million. Under terms of the agreement, the Sommer Trust was to pay $65.9 million of this amount. It ended up paying just $4.3 million, leaving LCI obligated by bank agreements to pay $83.5 million.

These increases, Goeglein said, were caused by several major changes in the Aladdin project, starting with a stronger foundation. Next to change was the Strip facade of the Aladdin, which was converted from a Bedouin tent-like structure to a massive "old world" structure with two 80-foot gates and a 170-foot mountain waterfall.

Next to change was the Aladdin's pool, which was originally planned to cover 30,000 square feet. The pool's size was tripled, and moved from the second to the sixth floor.

"As we continued to watch what the new properties were doing, we realized what we contemplated for our pool area was simply not going to be competitive," Goeglein said.

These changes contributed to the delays in the Aladdin's opening, Goeglein said, raising preopening and interest costs.

In exchange for its larger commitments, LCI received $30 million in preferred stock on Oct. 1, paying an annual dividend of 20 percent. These shares, Goeglein said, will soon be converted by LCI into an additional 15 percent of the Aladdin's equity. These shares will come from the Sommer Trust's stake, reducing its control of the Aladdin to 57 percent.

Last month, the budget of the Aladdin rose again, as the company requested an additional $60.4 million in financing. After this request, Aladdin's annual report said, "The Sommer Trust advised the company and London Clubs that it is not making any capital contribution in order to fund any portion of this budget increase."

On March 30, LCI provided an additional $13.5 million in cash and a credit line of $47.5 million to the company.

"(The Sommer Trust) has not been in a position to do that, because they've been unable to liquidate their real estate holdings," Goeglein said. "If one or the other doesn't come up with their share, the other (partner) is required to do so."

In exchange for its latest investments, LCI received the right to receive preferred shares that pay an extraordinarily rich dividend of 30 percent per year. Those funds would be paid out of any income the Aladdin produced. Remaining proceeds would be split 60-40 by the Sommer Trust and LCI.

LCI currently holds about $100 million in preferred stock paying these dividends, Goeglein said, which would entitle it to a $30 million annual payment before income was distributed, but after bondholders were paid interest costs.

LCI has no intent to try to gain a majority of the Aladdin's equity, Timmins said, but would be entitled to receive additional 30 percent preferred stock if it was asked to put in more capital without reciprocation by the Sommer Trust.

"We are not envisioning anything else (additional project costs)," Timmins said. "We've pretty well identified ... the project cost."

The Sommer Trust and LCI also struck a deal to give LCI four board seats to Sommer's three.

Many board decisions require a "supermajority" vote of 80 percent for approval, so a simple majority isn't enough to make big changes at the company.

"It does not in any way impact nor slow down our process from an operational perspective," Goeglein said. "We have the authority to do virtually everything we need to do without going to the board, the ability to make very quick decisions about virtually everything."

Though Timmins is in charge of day-to-day operations as COO, his appointment didn't have anything to do with the upgrade in LCI's investment, Goeglein said. Instead, he said, Timmins' elevation to COO was contemplated when Aladdin President James McKennon resigned last year. At the time, Timmins joined a three-man office of the president. Timmins became COO in January.

Though LCI now has much more control over the daily operations of the Aladdin, Timmins said there's unity about the direction of the project as August nears.

"Richard Goeglein and I see eye-to-eye on the market and how we've identified ourselves," Timmins said. "We're certainly in the ground zero spot on the Strip.

"We feel that the Aladdin is a fantastic project."

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