Decision nears on Le Reve funding

Monday, Oct. 21, 2002 | 11:15 a.m.

An initial public stock offering critical to Steve Wynn's Le Reve megaresort could be sold as early as Tuesday, though investors may be holding out for a better price for the shares they'll buy.

Jane Pedreira, a fixed-income gaming analyst for Lehman Brothers, New York, said the IPO is important to the success of the $2.4 billion financing package for the Las Vegas Strip property that would be built on the site of what once was the Desert Inn hotel-casino on the Las Vegas Strip.

Pedreira said there has been very little information about the status of the proposed sale of shares in the company, which are expected to be sold at $21 to $23 a share and raise $470 million.

Wynn's company is in the middle of a "quiet period" mandated by the Securities and Exchange Commission and can't comment on the status of the IPO.

Pedreira said it is common for equity traders to hold out in hopes of getting a better price for shares.

"There were no big orders from the get go, but that's probably because everyone is waiting for him to reduce the price," she said.

Wynn's track record as a Las Vegas innovator and a fortunately timed road trip coinciding with a stock market rebound also may be giving the project a boost during what has been one of the worst markets in memory for both high-yield bonds and initial public offerings.

Wynn was in Baltimore Friday following investor road trip stops in Los Angeles, Boston and New York, drumming up support for the 2,700-room Le Reve. The property, which would include a casino, a three-acre lake, an 18-hole golf course, a Cirque du Soleil entertainment venue and Maserati and Ferrari car dealerships, is scheduled to open in April 2005.

Interest in the IPO has been mixed.

Wynn has had his share of controversy with analysts and investors, some of whom have criticized Wynn for spending too much on Bellagio, limiting the flow of financial information to investors while he ran Mirage Resorts and stacking the boards of directors of his companies with associates beholden to him instead of public shareholders.

Ernest Monrad of Northeast Investors, Boston, said he was "a little amused that he's looking for public stockholders" considering that Wynn at one time said he would never go to Wall Street again for financing after being criticized by shareholders on his strategies. But that, he said, wouldn't hurt Wynn's or the project's credibility.

"The one thing you have to have in this business is flexibility," said Monrad, the manager of a $1.7 billion high-yield fund. "Steve Wynn is very impressive, he's a spellbinder. His knowledge and scope of what goes into a hotel is incredible. In the road show here, he talked for about an hour and he was still going. He's a great speaker."

Luck seemed to be on Wynn's side last week, with the stock market climbing out of weeks of doldrums.

"It really helps that the stock market has been up five out of the last six days," Monrad said. "Timing is everything. I'm not sure how well this would have flown Sept. 30 when the Dow was off 23 percent and the S&P was down 28 percent."

But Dow Jones News Service reported this morning that the weak IPO market suffered another setback last week with the postponement of deals from insurance broker U.S.I. Holdings Inc. and oil and gas company Plains Exploration & Production Co.

And Dow Jones noted that while Wynn's IPO has received some positive chatter, many IPO analysts are now vocally questioning the offering, noting it will help finance a project that won't generate revenue until 2005.

The deal is "essentially a public construction loan," MorningNotes.com President Ben Holmes said.

Some investors may not be ready to take such a leap of faith, said Holmes, whose company is an investment-advisory firm.

"It's going to be a really tough deal to sell to smart people," Holmes said.

The equity component of the financial package is giving bond investors comfort with Wynn's separate junk bond issuance for Le Reve.

"If the equity gets done, the high yield (bonds) will follow," said John Maxwell, a gaming analyst for BNP Paribas, New York. "The big question mark will be the equity he (Wynn) is trying to raise."

Maxwell said the IPO money raised would be in escrow and a protection to bondholders during the construction phase of the project.

"As an investor, you have to look at the fact that the property won't open until mid-2005," Maxwell said. "A lot of issues can occur in that time frame. But there will be less risk for bondholders if the money is being escrowed. There's significantly more equity than in the Venetian or the Aladdin projects."

"As a bond buyer, you like a little meat on the bones," added Monrad. "As an investor, you want somebody else to walk the plank before you do."

While the bond market has been in decline this year, issues involving gaming companies have been positive, Pedreira said.

Pedreira said high-yield bonds this year have posted a 7.7 percent loss through September, but bonds in the gaming sector have been up 10.6 percent in that same time frame.

What Wynn would pay in interest on the bonds is a subject of speculation.

Monrad said at the Boston presentation, a rate of between 10.625 percent and 11 percent was discussed. But Pedreira said she thought a rate of between 12 percent and 13 percent is more realistic based on current conditions.

Presently, bonds for the neighboring Venetian hotel-casino are at 11.8 percent. Las Vegas Sands Inc., parent company of the Venetian, is having its bond rating reviewed for an upgrade by Moody's Investors Services, New York, which cited strong business and improved cash flow at the megaresort.

Currently, Wynn has a credit rating that is one notch above Venetian and Pedreira credited Wynn's track record as a casino developer for that.

Wynn's experience in the market, some experts said, is carrying a lot of weight with investors.

"When Wynn opens something, history has shown that there is new excitement and new demand for the market," said BNP Paribas' Maxwell. "The new property will be the first big project to open since the Aladdin, so the market will really be ready to see what he has created."

Wynn has been credited with generating enthusiasm for Las Vegas with his openings of The Mirage, Treasure Island and Bellagio, which now are owned by MGM MIRAGE, which bought Wynn's Mirage Resorts in 2000 for $6.4 billion.

"It's not a question of whether he's going to build something that people are interested in," Maxwell said. "The question is will Steve Wynn build something that will be good for investors."