Observers disappointed with Kerzner’s abandonment of Desert Inn deal

David Strow

Friday, March 3, 2000 | 10:52 a.m.

Sun International Hotels Ltd. announced Thursday it is pulling out of a $275 million pact to buy the Desert Inn -- a move seen by many as a severe blow to hopes of revitalizing the north end of the Las Vegas Strip.

Sun International's announcement surprised few on Wall Street. Rumors had circulated for weeks that Sun International officials, trying to finance a $378 million effort to take the company private, were backing away from the Desert Inn and owner Starwood Hotels Resorts Worldwide Inc.

"There's concern that could delay the review process (before the Nevada Gaming Commission)," said Dan Gibson, spokesman for Starwood. "At the same time, Sun could use the $275 million as they're taking their company private. They've got plenty of other uses for cash right now."

Gibson said Starwood will immediately put the property back on the market, though no buyers have been lined up yet. Starwood is in the process of divesting its gaming assets.

The controlling shareholders of Bahamas-based Sun International announced in January their plans to purchase the 47 percent of the company they don't already own for $378 million. The group is led by South African billionaire Sol Kerzner.

The company operates casino resorts in the Bahamas, Atlantic City, Connecticut and the Indian Ocean. But the Desert Inn was to be Kerzner's first in Las Vegas -- and many had high hopes he would put a Steve Wynn-like boost into Las Vegas Boulevard north of Spring Mountain Road.

"If there is a casino that out-Bellagios the Bellagio, it would be the Atlantis (in the Bahamas)," said Anthony Curtis, publisher of the Las Vegas Advisor newsletter. "Kerzner's very Wynn-like, in the way he builds. We were expecting something extraordinary down there (at the Desert Inn).

"The north end (of the Strip) ... doesn't just need a facade and dressing up. It needed a new spectacle. That was what (Kerzner) was all about."

Now, Curtis said, the hopes of the north end may now ride with Frontier owner Phil Ruffin and San Francisco developer Luke Brugnara -- both who have announced plans to develop separate San Francisco-themed resorts at their north Strip properties.

"I don't think the Stratosphere adding hotel rooms or the Sahara adding a (NASCAR-themed attraction) is going to get it done," Curtis said. "The Kerzner thing would have just redone the north end, given a whole new reason to be there."

Bill Thompson, chair of the department of public administration at UNLV, said the area could have used a powerful new developer like Kerzner -- particularly with the possibility of a new wave of mergers on the Strip, set off by MGM Grand Inc.'s flirtation with Mirage Resorts Inc.

The north Strip's independent casinos, Thompson said, "become vulnerable as takeover targets. If they linger out there, they're going to be left way behind."

"(Kerzner's pullout) is not good news for Las Vegas," Thompson said. "We want Sol Kerzner in Las Vegas, especially if we're getting these big conglomerates. It certainly doesn't bode well for the north Strip ... that's vulnerable territory."

It isn't good news for Starwood, either. The Desert Inn has been on the market since January 1998, and had seen a wide range of window-shoppers, including entertainer Michael Jackson. Now, analysts say, Starwood will have considerable difficulty unloading the property at prices anywhere near the $275 million Kerzner was willing to pay.

"It will be difficult, because you really need a strategic buyer who wants the Desert Inn and the strategic plot of land (next door)," said Dave Anders, gaming analyst with CS First Boston. "I don't know how many of those are out there. Most are tied up in the Mirage transaction.

"Given the decline in casino stock valuations since this deal was announced ... it may be a good bit more difficult (to sell)."

Relatively weak cash flow will also work against the property, said Dave Ehlers, chairman of Las Vegas Investment Advisors.

"Purchase price is a function of cash flow, nothing more," Ehlers said. "This (the Desert Inn's cash flow) isn't cutting it. It doesn't sound too good to me."

Starwood is at least partly insured against a drop in value. If Starwood has to sell the property for less than the $275 million Sun International was willing to pay, Kerzner's company will pay 50 percent of the difference, to a maximum of $15 million.

"We'll be actively remarketing the property immediately," Gibson said. "But we haven't really been testing the waters, because we had a deal."