Expert: Aladdin needs $100 million overhaul

David Strow

Thursday, May 17, 2001 | 10:55 a.m.

The Aladdin's new life on the Strip started as a struggle last August, when the $1.2 billion resort's opening was delayed 16 hours by extended safety tests.

Since then, it hasn't gotten any easier. The Aladdin's latest financial report, which Tuesday showed anemic cash flow and a severe net loss, has triggered fresh speculation that the Aladdin will soon file for bankruptcy. It would be the largest bankruptcy in the Nevada gaming industry's 70-year history.

It's been often speculated that another large casino operator -- most likely Park Place Entertainment Corp. -- would move in during bankruptcy proceedings to take control of the Aladdin. But observers say whoever controls the Aladdin must be prepared to spend a good chunk of money in order to get the Aladdin firing on all cylinders.

"There's a number of things they have to do to make it work," said Jason Kroll, gaming analyst at Bear Stearns. "But given its location (on the Strip), it can be a success, particularly under the umbrella of a large corporate enterprise with a large (customer) database, that could spend some money and use its resources to do things that could maximize the property's potential.

"You probably need to put a minimum of $100 million into it, if someone wants to do it right."

The Aladdin began its life with a high hurdle to cross. The property's heavy debt load -- $670 million in long-term debt as of March 31 -- means the Aladdin must make substantial debt payments each year. The property's lease and debt payments will add up to $74.4 million over the next 12 months.

That means the property must produce at least that much a year in "cash flow" -- a commonly used measure of casino profitability -- to stay afloat. But over its first seven months of operations, it produced less than $20 million in cash flow.

Rocky ramp-up periods aren't unusual for Strip casinos. The Venetian struggled mightily in its early days in 1999, and even the Bellagio didn't perform up to expectations early on. Both properties rebounded and are among the most successful on the Las Vegas Strip.

But the Aladdin doesn't have what those properties did have -- the financial backing of a powerful sponsor. In the Venetian's case, Sheldon Adelson was able to provide whatever cash or credit the property needed to get through a tough phase. And the Bellagio had the financial power of Mirage Resorts Inc., then MGM MIRAGE, behind it, as well as a huge database of frequent Mirage Resorts customers.

The property doesn't have those advantages. Minority owner London Clubs International has poured more than $200 million into the project, but has taxed itself financially in the process, leaving the company vulnerable to takeover. And the majority owner, the Sommer Trust, has had historic difficulties in liquidating assets to finance the Aladdin in the past, though it has put up nearly $9 million so far this year.

The Aladdin has launched cost-cutting measures to try and save money -- since opening, the hotel-casino's workforce has been reduced from 4,000 to about 3,200, something that should save $10 million per year, the company says.

But the Aladdin's disappointing cash flow and heavy debt load have still drained its bank accounts, leaving it dependent on its two owners for continued solvency. The Aladdin had $9 million in the bank early this month; it says it needs another $8.7 million from the two backers in 12 days.

For the Sommer Trust and LCI, that could be a tough investment to make. As of March 31, their stock in the company carried a negative value of $4.4 million.

Moreover, neither company appears in a position to pump in the $100 million in cash many analysts believe the property needs to launch a makeover.

Unless the property can produce more cash, it would be difficult to borrow the money to do such a project -- but renovations are what would help them produce the necessary cash to make the property a success.

"They're hamstrung in terms of making the improvements that would help them," Kroll said. "It's a Catch-22."

Design weaknesses

The Aladdin's primary strength is its location. Located in the dead center of the Strip, the property sits near a river of pedestrian and automotive traffic making its way up and down Las Vegas Boulevard.

But the Aladdin's design makes it difficult to capture most of that traffic, observers say.

To enter, you must walk up flights of stairs to a non-descript entrance that isn't easily visible from the Strip. If you're driving, you enter the property from Harmon Avenue, not Las Vegas Boulevard. And the property has no single design element to make it stand out, leaving it overwhelmed by the Eiffel Tower replica of Paris Las Vegas and the fountains of the nearby Bellagio. From the north, in fact, the large Paris Las Vegas marquee hides much of the Aladdin.

As a result, much of the heavy traffic walking along the Strip near the Aladdin never goes inside.

"It seems like it's been sealed," said Anthony Curtis, publisher of the Las Vegas Advisor newsletter. "It's not visible, it's not accessible, and it's just difficult to get into. At Caesars or the Bellagio, it's obvious how to get into the joint. They (the Aladdin) broke a cardinal rule, and proved why it's a cardinal rule."

That's the first thing that needs to be fixed, Kroll said.

"There's no sense of awareness walking into the Aladdin ... you don't even know where the casino is in relation to Desert Passage," Kroll said. "You have to figure out a way to get the people into the property, then creating something in front that creates a sense of who they are. Somehow the property's got to create a better sense of being a must-see."

Once inside, patrons have the ability to go to hotel rooms, the convention center and the Desert Passage shopping mall without ever setting foot into the casino. In some areas, such as the Desert Passage, it's difficult to even find where the casino is located -- and therefore, it's difficult for the mall and the casino to drive traffic for each other, as was planned.

"It wasn't built to drive incremental slot or table game play," said Andrew Zarnett, gaming analyst with Deutsche Banc Alex. Brown. "It was almost built to give the customer a way out."

That's more difficult to fix, Zarnett notes, because it would require a radical redesign of the property. Zarnett also said the Aladdin also lacks other features that would drive business -- such as a large convention center -- but doesn't have the necessary room to build one.

Because of these challenges, Zarnett believes the property's maximum cash flow potential is only $60 million per year -- suggesting the property will never be able to fully cover its debt payments. Design improvements could improve that by $5 million to $15 million per year, he said.

But the biggest improvement could come if the Aladdin were owned by a larger company, Zarnett said. With economies of scale and cross-marketing, the Aladdin could produce $90 million a year in cash flow -- but probably not much more than that, Zarnett said.

Who would buy it?

Who would that new owner be? Virtually everyone's guess is Park Place, which owns one-third of the Aladdin's bonds.

If the Aladdin went into bankruptcy, Park Place could use its bond position as a foothold and propose a reorganization that would give it control of the property.

Financier Carl Icahn used this method several years ago in his takeover of the Stratosphere in bankruptcy court. But the bonds alone wouldn't be enough, as Park Place doesn't have a majority stake, and the Aladdin's bank debt must be repaid before the bonds.

Park Place isn't ruling out a takeover, but isn't committing to it either.

"If it doesn't do well, we'll have an opportunity to take a look at what opportunities exist there," Park Place Chief Executive Tom Gallagher said last week. "If it doesn't fit the kind of returns we need ... we'll take a pass. It would take a lot of money to deal with."

Though it would be a larger gaming deal than Icahn has ever attempted, Kroll believes the New York financier must also be considered a candidate. Icahn acquired all three of his Las Vegas properties in bankruptcy court, but was thwarted in his efforts to take over the Claridge in Atlantic City by Park Place. Could the two tangle again at the Aladdin?

"Carl Icahn is someone you should never rule out," Kroll said.

MGM MIRAGE, the largest player on the Strip, is also mentioned by some as a possible pursuer of the Aladdin.

"It would be foolish to say never, because we're a significant company in this state, a significant player on the Strip, and it would be irresponsible of us not to understand any opportunity, including the Aladdin," said Jim Murren, president and chief financial officer of MGM MIRAGE. "(But) we have a lot on our plate right now. We are focusing on expanding our own building, improving our own performance, and we preach focus at this company. There are far more likely outcomes at the Aladdin."

Besides, Murren said he's not convinced bankruptcy is inevitable.

"It's really hard to kill a casino," Murren said. "They're inherently very profitable businesses, and that's why investors like casinos. It's extremely premature to predict the demise of that property. My guess is they can do better than they're doing now.

The Aladdin, in fact, predicts a redesigned slot floor and improved marketing will boost its profits.

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