New rule to help Wynn financing

David Strow

Friday, June 23, 2000 | 11:10 a.m.

A new gaming regulation proposed by Steve Wynn on Thursday should make his task of financing the new Desert Inn megaresort far easier, analysts say.

The amended regulation would allow institutional investors -- as defined by the Securities and Exchange Commission -- to hold up to 15 percent of a private company's stock without being licensed by the Nevada Gaming Commission. Currently, shareholders in privately held companies must be licensed regardless of the size of their stake.

"That makes it much easier for him to steer additional equity partners into the project," said Eric Matejevich, high-yield bond gaming analyst for Merrill Lynch. "The process by which one gets a gaming license is highly intrusive, and many folks don't like to go through that.

"(The new regulation) makes it seem as if he'd do a lot more private equity, a lot less debt."

"We want to be very careful about who's involved in gaming in the state of Nevada," said Steve DuCharme, chairman of the state Gaming Control Board.

On Thursday, the commission accepted Wynn's petition to consider a change to the regulation. Dennis Neilander, member of the Gaming Control Board, said the amendments will probably be considered at the July meeting of the commission in Las Vegas.

"The thing that's appealing to me about this regulation is that it has a broad application which goes way beyond what Mr. Wynn wants to do," Neilander said. "(The waiver) has brought in a tremendous amount of capital (from institutional investors for public companies) with minimal regulatory risks. It's logical to extend it now to private companies."

Investors would still have to undergo an investigation before being allowed to make their purchases, but this investigation would not be as extensive as a licensing investigation, Neilander said.

Unlike similar investments in public companies, investors would be barred from voting for a private company's board of directors -- essentially stripping them of all voting power. Nor would private company investors be permitted to sell shares without prior commission approval.

If passed, gaming investors such as Kirk Kerkorian or Carl Icahn could also use the waiver to their benefit, Neilander said.

"For certain operators, capital is cheaper now in the private marketplace," Neilander said. "We're all for getting additional capital into the state. I have seen some interest in this kind of deal, aside from what Mr. Wynn is proposing."

The project Wynn discussed Thursday will require substantial amounts of capital -- probably in excess of $1.5 billion, analysts say.

Wynn told the commission of plans to build twin 3,000-room hotel towers on the 218-acre parcel where the DI now stands. The first tower, Wynn said, will rise 59 stories from the Las Vegas Strip.

Irwin Molasky, a Las Vegas developer and business partner of Wynn, said the new hotel-casino "is going to be amazing."

"It's something Las Vegas has never seen before ... the world has never seen this before," Molasky said.

The conceptual plans, Molasky said, are a casino "full of light and gardens, with no theme." The property's restaurants would sit along the bank of a 30-acre lake in the back of the new property -- a lake four times larger than the one in front of the Bellagio. Sitting in the middle of the hotel is a 200-foot-by-600-foot garden area, lit by all natural lighting.

"It is the vision of tomorrow, something the Las Vegas community will be very proud of," Molasky said.

Recent projects of similar size, such as the Mandalay Bay, Venetian and Bellagio cost between $950 million and $1.6 billion.

"If he wants to top the Bellagio, he's going to have to spend at least as much as the Bellagio," said Steve Altman, debt analyst with Duff & Phelps. "The Bellagio cost at least $1.6 billion. Two to three years from now, (the new project) would cost that at a minimum."

Wynn, however, is insistent that he won't turn to the public equity markets to finance the deal, at least initially.

"That sounds an awful lot like a guy named Sheldon Adelson (developer of the Venetian)," Altman said.

Wynn put $270 million in equity into the project with the purchase of the DI from Starwood Hotels & Resorts Worldwide Inc. Wynn's Mirage Resorts Inc. was sold last month to MGM Grand Inc. Wynn cashed out his Mirage stock for about $500 million.

To finance the Desert Inn. project with debt and bank financing, analysts estimate Wynn would need to provide at least 25 percent equity as collateral, possibly as high as 40 percent.

On a $1.5 billion project, that would translate to $375 million to $600 million in total equity. Citing sources, the Wall Street Journal reported today that Wynn has approached fund managers and private investors to raise money for a $400 million private equity placement.

Though Molasky said pinning a cost on the project at this point is purely speculative, he did say Wynn wouldn't have any problem finding private financing.

"A number of people would do anything to be his partner," Molasky said. "He has a lot of partners lined up."

However, Wynn will still have to turn to the bond markets to build the project, analysts say. And they're divided on how much appetite bond buyers would have for the project.

"The debt markets have always been very kind to Steve Wynn," Matejevich said. "When the equity holders were giving him problems, the debt people really didn't say much.

"I still think the debt community really believes in what he can do with the project. He tapped high-yield (bonds) to build the Mirage, and had several successful deals where he was able to refinance the bonds. People like to see that."

But Altman believes it may be more difficult, given rising interest rates.

"Investors, while perhaps admiring his creative genius, also know his penchant for spending more than he anticipated," Altman said. "The market is just not there yet for new projects, at least any old new project.

"(New projects) have to raise the bar again, and Steve has shown he's certainly capable of doing that. I'm sure he'll be fairly creative in how he'll raise the capital. He certainly knows a lot of big shots."

To clear out room for development, Wynn has indicated he will move development into the land now occupied by the Desert Inn golf course. Blocking that development are more than 25 homes now located on the course.

Molasky has assisted Wynn in his efforts to buy out those homeowners so development can proceed. To date, Wynn has purchased all 11 homes in the interior of the course at a price of $2 million each, Molasky said.

The 20 remaining homes lie on the perimeter of the Desert Inn golf course. Molasky said Wynn has offered prices ranging from $900,000 to $1.2 million for the remaining homes -- about 10 percent above their appraised value, he said.

Though Wynn was willing to put up $2 million apiece for interior homes because of their critical location, he won't make that offer for the perimeter houses, Molasky said. Wynn's offer will expire June 30.

"We're completely finished," Molasky said. "Those that want to sell will sell, and those that don't will stay there, and we wish them luck.

"We're just not going to pay them double for what they're worth. We'll design around them."

But Frank Catania, a homeowner at the Desert Inn, said Molasky was the one who had changed the rules. At a meeting of the homeowners, Catania said Molasky told the homeowners they would all receive a price based on the appraised value of their home, plus a 10 percent premium.

"He said, 'The inside lots, outside lots are all the same to us ... there will be no impartiality, no favoritism, no negotiating,' " Catania said. "That was repeated about five times."

Following this meeting, however, the 11 interior homeowners, through an attorney, negotiated the $2 million per home price for their properties, Catania said.

In the 1950s, Catania said, he went to work for former DI boss Moe Dalitz "with a handshake and the word of a gentleman."

"That's the kind of people I'm used to dealing with," Catania said."I am a man of my word, and when people tell me what they're going to do, I expect them to do that. When you change the rules of the game, I expect to play by those rules. If they got $2 million, I expect to get $2 million."

Catania vowed the homeowners aren't about to back down with the deadline looming.

"I would have to think that with all these little threats, they're looking for a problem," Catania said. "The sooner they get rid of this problem, the better off they're going to be."

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