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Las Vegas Sands: A big rise, a big fall
Sunday, Jan. 18, 2009 | 2 a.m.
TOP: BLOOMBERG NEWS FILE PHOTO; ABOVE: ASSOCIATED PRESS FILE PHOTO
Las Vegas Sands opened the Venetian Macao, the largest resort in the world, in 2007, and had planned to build several more resorts on the Cotai Strip before credit markets collapsed. The company has suspended work on its Macau projects indefinitely, meaning shareholders will not see any profit from its investment in them.
Unfinished projects in Macau: Work on Las Vegas Sands' development of Macau's Cotai Strip has halted because of financing problems. The first phase of the plan was for eight resorts costing $10 billion.
Sheldon Adelson, the son of poor immigrants, rode the success of Las Vegas Sands Corp. almost to the top of Forbes' list of the richest Americans.
In better times: William Weidner, left, and Sheldon Adelson, top executives of Las Vegas Sands, look at a model during the groundbreaking ceremony in March 2007 for the Shangri-La Hotel, Traders Hotel, Sheraton Hotel and St. Regis Hotel, all part of the company's ambitions plan to develop Macau's Cotai Strip.
Beyond the Sun
Las Vegas Sands was once the envy of Wall Street. In fall 2007, with seemingly unlimited growth prospects in Macau, the most lucrative gambling market in the world, the company’s share price topped out at nearly $150.
Founder and Chief Executive Sheldon Adelson’s personal fortune rose with the company’s. On the strength of his stake in Las Vegas Sands, his net worth reached an estimated $28 billion, according to Forbes’ list of richest Americans in 2007.
Adelson, the combative son of a cabdriver, peaked at No. 3 on that list and had his eye on the top spot, held by Microsoft founder Bill Gates.
But then came the fall, a drop so fast and long that even in this era of suicidal reversals on Wall Street, Sands stands out.
The company’s market value plummeted more than 90 percent.
Adelson’s net worth shrunk by an estimated $13 billion.
To fend off Sands’ creditors, Adelson and his family injected $1 billion of their fortune into the company.
Neither Adelson nor any company executive would comment for this story, but a review of the public record and interviews with people familiar with the company’s dive provide details showing that a combination of factors were at work: bad luck, bad corporate blood, and hubris.
Certainly Adelson and the company were victims of a global financial crisis that many financial wizards failed to see.
But some industry analysts contend Sands executives played a key role in the financial decline, pushing ahead with efforts to dominate the Macau gambling market and stretching the company thin even as indicators showed credit drying up and tourism faltering.
When asked why the company didn’t raise needed cash sooner, one Sands executive, speaking two months after September’s stock market collapse, admitted to a “monumental screwup.”
That admission surfaced in a shareholder lawsuit filed in November alleging the company’s troubles weren’t solely the result of poor economic conditions or ill-timed business decisions.
“The company’s troubles mainly stem from a poorly functioning board of directors that has remained supine in the face of ... Adelson’s domination and decision to treat this public company as it if were private — in other words, his own corporate vehicle by which to aggressively develop casinos and resorts all over the world without concern for its effect on the financial solvency” of Sands, the lawsuit stated.
Years from now, what happened to Sands could be the stuff of business school case studies. Here is a first draft.
BIG RISKS, BIG REWARDS
The casino business is all about risk. Casinos are highly leveraged businesses costing hundreds of millions, even billions, of dollars. Their gambling pits use mathematical formulas that pinpoint risk down to a fraction of a percentage point.
Experienced Las Vegas operators have historically been richly rewarded for taking big risks. But even by gaming industry standards, Adelson’s resume offers something of a graduate-level course in the potential pitfalls and rewards of risk-taking.
When he created Comdex in 1979, a computer trade show that would eventually draw more than 100,000 people and make Adelson very rich, he said he chose Las Vegas as its home on a hunch that business people would like the spectacle.
“There’s a saying that goes around — Wayne Newton fills the showrooms, Frank Sinatra fills the hotels and Comdex fills the city,” Adelson told the Sun in 1995. “We’re kind of proud of that.”
When he constructed the $105 million Sands Expo & Convention Center in 1990 — the largest privately owned building of its kind in the country when it opened — critics viewed it as a foolhardy expenditure for a gambling town that had a publicly funded convention center.
With the $1.5 billion Venetian, which opened in 1999 next door to the Sands convention center, Adelson raised the stakes, betting that his flourishing trade show business could fill an upscale megaresort. He would lure conventiongoers to the Venetian with bigger rooms and more hotel amenities, charging top dollar for rooms midweek.
Competitors scoffed at the strategy, predicting failure based on the assumption that conventiongoers didn’t gamble much.
Adding to the risk, the Venetian was financed with junk bonds at interest rates as high as 14 percent, higher than other operators paid at the time.
Analysts, influenced by critics of Adelson’s unproven business plan, worried the resort wouldn’t make enough money to pay its bills.
But Adelson proved a winner. He eventually refinanced and paid down the expensive loans, making the 4,049-room Venetian, which opened a 1,000-room hotel expansion in 2003, one of the most profitable casinos of all time.
As his businesses expanded, Adelson butted heads with local forces, including the Culinary Union and the Las Vegas Convention and Visitors Authority, fueling lawsuits, pickets and controversial legislative efforts.
His two resorts, the Venetian and Palazzo, are nonunion outposts along a unionized row of casinos facing Las Vegas Boulevard. In his battle with the Culinary, Adelson has admitted that he doesn’t like being told how to do things. He also made enemies in construction circles after protracted litigation with the contractor building the Venetian.
“He doesn’t fit in the club and doesn’t kiss the rings of certain people,” said one gaming executive, referring to longtime gaming executives who form an insular group..
“Anything that rubs us the wrong way or that we don’t understand, we criticize,” the executive, who requested anonymity, said of that group.
Adelson, whose parents emigrated from Russia to escape persecution, recalls being victimized as a child in his poor Boston neighborhood for being Jewish. He began to claw his way out of poverty with a series of jobs that began with selling newspapers on street corners.
“You have to go into a business and ignore all the taboos and mores by asking, ‘why and why not?’ ” Adelson told the Latin Chamber of Commerce days before the Venetian’s debut. “Why do people do things in the business the way they do and why not some other way? Of the 50 businesses I’ve been in, I never did it the way people were doing it.”
By making piles of money on hotel rooms, Adelson helped redefine a business that had focused on gambling revenue at the expense of other amenities. His success at the Venetian was emulated by competitors such as Mandalay Resort Group, now part of MGM Mirage, which opened a 1.8-million-square-foot convention center at Mandalay Bay in 2003.
The convention business, a big part of the Strip’s growth spurt since 2001, has helped to prop up room rates in Las Vegas during traditionally slower periods, creating year-round demand.
Success seemed to make Adelson more sure of his strategies. He appeared to revel in proving the doubters wrong and showing up more cautious competitors.
His appetite for confrontation and risk seemed to grow, gaming analysts and investors say, leading to trouble for Las Vegas Sands.
AMBITIONS FOR MACAU
Macau — a semi-autonomous province of China — began welcoming Western casino operators in 2002 in an effort to rise above its roots as a seedy gambling den and broaden the region’s appeal to Asian tourists with Las Vegas-style resorts.
Las Vegas Sands was the first Western company to open a casino in Macau, in 2004.
The early bet paid off big. The company recouped its $240 million Sands Macau construction budget within a year of the opening. The casino, which has more than 600 table games yet fewer than 300 hotel rooms, primarily offered to Chinese gamblers for free, gained a foothold ahead of the resorts that followed.
The Sands Macau was just the beginning of Adelson’s ambitions in China.
A year before the casino opened, the company laid out a decade-long building plan for more than 20,000 hotel rooms and millions of square feet of retail and convention space on reclaimed land between two islands.
The first phase of the company’s Cotai Strip would include eight resorts at a cost of $10 billion.
Privately, competitors scoffed at Adelson’s idea as the product of an out-of-control ego. But he had proved them wrong before. And Wall Street, eyeing profit growth that was perhaps unprecedented in American business, was dazzled.
Las Vegas Sands initially planned to finance its Cotai Strip resorts with hotel partners. But some hotel companies didn’t want to risk capital in a market they were less familiar with and one that was based on gambling revenue, which they wouldn’t receive a cut of.
Ultimately, the risk fell to Sands. But that was good news on Wall Street, which was salivating at the prospect of millions of newly prosperous Chinese spending money in Macau.
Before the credit boom, casino operators generally lined up financing before building their properties. Sands took a riskier, more lucrative route by raising money in stages, during the development and construction process. With capital easy to come by, the company could negotiate the lowest rates and expedite construction rather than wait for each property to open and make money first before beginning the next project.
Few on Wall Street questioned this ambitious strategy, which was unprecedented in its scope and speed. The plan was perfect for the times.
“Nobody was really critical at the time because money was loose and cheap,” Deutsche Bank stock analyst Bill Lerner said.
Also, Sands had gained an impressive track record in a short time, building resorts with stellar returns at reasonable cost, Lerner said. “When they announced something, investors just assumed that it would be executed flawlessly from a financing and operating perspective,” he said.
In September 2007, Sands opened the Venetian Macau, which anchors the entrance to the Cotai Strip. At 10.5 million square feet, the resort is one of the world’s largest buildings and about twice the size of the mammoth Venetian in Las Vegas. The resort includes a 1.2-million-square-foot convention center, a 1-million-square-foot mall, a 15,000-seat arena, more than 700 table games — a world record — and more than 3,400 slot machines.
In August 2008, the company opened its second resort on the Cotai Strip — a Four Seasons hotel, accompanied by a luxury mall.
Two months later, the stock market would crash. Financing for new projects would vanish. And Sands would be left without the cash to finish what it had started.
RIFT AMONG THE BRASS
The economic downturn, which has pounded Las Vegas tourism, exacerbated Adelson’s financing problems.
The company was using cash generated by its resorts on the Las Vegas Strip to finance growth in Macau. Lower earnings here meant less money to pay bills in Macau.
Sands executives appeared confident that money would be available to finish projects that were stacking up in the pipeline.
But after investment bank Bear Stearns collapsed in March, an early victim of the subprime mortgage crisis, investors soon began asking Sands about plans for raising capital.
The company began construction on a condominium tower between the Venetian and Palazzo during 2007 and, in an August 2008 news release, said: “Addressing would-be skeptics, Adelson said quality and luxury sell in any type of financial environment and, when combined with the premium location of these residences, he believes the company has a surefire winner.”
Executives continued to counter reports they were having difficulty raising money to complete the Macau projects, telling media the company would push forward there despite the global credit crisis.
The troubles opened a rift in company management.
Sands Chief Operating Officer Bill Weidner would later call the dispute between executives advocating going full steam ahead and those favoring a more conservative approach in the face of economic troubles a “junkyard dog fight.”
In comments to a crowd of investors and analysts at the casino industry’s largest trade show in November, Weidner said the bitter disagreement led to a delay in raising money for Macau and other projects.
The failure to line up financing, he said, was a “monumental screwup.”
Sands created a special committee, including three board members, to help resolve management disputes and “in response to a loss of confidence by certain senior management members in the management of the company and our governance process.”
Finally, in November, the company announced it was pulling the plug on its unfinished Macau projects. The company would end up spending more than $1 billion to put various projects — including the Strip condos — on hold and to redesign a scaled-down resort under construction in Pennsylvania, industry analysts said.
Gaming insiders say Weidner’s public mea culpa wasn’t an admission of mistakes so much as an olive branch to concerned shareholders.
Investors had become increasingly anxious as financing needed for the company’s Macau plans failed to materialize.
But some gaming insiders say it was a risky, yet reasonable, move for Sands executives to wait for banks to loosen their purse strings.
“If I were in Sheldon’s shoes I would have done the same thing,” said one gaming executive, who declined to be named. “You really don’t know at what point the markets are going to stop vacillating. Sometimes you have to let things run their course.”
As the economy continued its decline, the Chinese government — concerned about runaway growth in Macau, money laundering in casinos and the effects of Chinese citizens gambling away their paychecks — initiated a series of visa restrictions aimed at reducing the number of visitors to Macau from mainland China.
Because Macau is the only place in China where casino gambling is legal, and given the propensity of Chinese to gamble, the restrictions were a kind of spigot that could be turned on and off, directly affecting business at Macau casinos such as the Venetian.
Buried deep in the company’s contracts with lenders were more immediate troubles: The company wasn’t making enough money, relative to its interest expenses, to stay under a maximum leverage ratio. Exceeding this ratio could trigger a default and a Chapter 11 bankruptcy filing by allowing banks to collect on the debt.
Company shares sank to less than $8 when Las Vegas Sands accountants disclosed the news in November.
Within a week, Adelson had invested another $525 million into his company on top of a $475 million cash infusion he made in September.
In a last-ditch effort to raise money, the company also issued 182 million shares of stock, more than doubling the number of outstanding shares but diluting their value. With this capital infusion, the company was able to avoid defaulting on its loans.
Aside from the company’s financial woes, the revelation of a management team at odds, for some investors, overshadowed positive steps taken to correct the problems.
“I think it’s problematic, especially in times of crisis,” said Joe Fath, a portfolio manager for T. Rowe Price Associates. “This environment is bad enough, even without a management team that can’t get along. That’s a huge headwind, in my opinion.”
FUTURE CHALLENGES
Some investors and analysts say Sands, overloaded with debt that will be tough to pay down in a troubled economy, is ultimately to blame for not raising money earlier, when banks were more willing to lend and capital was less expensive.
“A prescient CEO or CFO would have seen this coming,” Fath said of the credit crisis. “They knew what their financing needs were and they knew they were building ahead of financing.”
Lerner, the Deutsche Bank stock analyst, said the company took a wrong turn by continuing to build after the credit markets faltered.
“After it was apparent that everyone was having trouble raising capital, they continued to tap credit facilities and use liquidity to fund projects that became speculative,” he said.
Experts say this criticism is echoed by greedy investors who should have sold their shares when they were overvalued and hype about Macau was at its peak. Some shareholders have been richly rewarded by the company’s aggressive strategy, which had maximized shareholder profits until the markets collapsed.
Some experts remain starry-eyed over the prospects of the Cotai Strip despite the company’s financial difficulties. Dominating Macau, with its feeder market in mainland China, home to more than 1.3 billion people, will pay off in the long run, they say.
“Recreating the Las Vegas Strip in Asia — it’s brilliant,” said Dennis Farrell, a bond analyst with Wachovia Capital Markets. “It takes a visionary to do what Sheldon is doing there.”
But Farrell acknowledges that “going from what they have today to where they want to be is a big leap” that will also require more infrastructure in Macau, including a larger airport. That will take years, he said.
The company has emerged at the forefront of a longer-term trend as other regions consider allowing casino resorts to drive Las Vegas-style tourism. As the lead architect in Macau, Las Vegas Sands — which beat out American competitors for rights to build one of two casino resorts to open in Singapore in the coming year — is well-positioned to compete for opportunities in places such as Japan and Taiwan, where observers say casinos are simply a matter of time.
Las Vegas Sands’ admirers believe the company will emerge from its challenges and the economic downturn with a slower, though surer, gait.
The company appears to be performing respectably in desperate times, including achieving 92 percent capacity at the Venetian and 95 percent at Palazzo, at rates of more than $200 a night, in the third quarter. The Venetian Macau attracted a record 6.6 million visitors that quarter.
“Their management team is made up of very smart, seasoned gaming professionals,” Farrell said. “As long as they are wise about their growth prospects and take a more seasoned approach, I think there will be a lot of longevity with the company.”
Fath is more pessimistic, saying the company’s errors combined with a worsening economy will make survival difficult.
“I’ve been talking to CEOs and COOs who’ve been doing this for 40 years and they’ve never seen anything like this (economy),” he said.
A reflection of the company’s hard-charging chief executive, Sands is a high-risk, high-reward company that has now become an even bigger gamble for investors.
With the company struggling to keep its leverage in check in these tough times, Fath said he is unwilling to join the ranks of speculators who are gambling by investing in its stock.
“People are making a bet that (Adelson) will write another check” to shore up the company, Fath said. “That’s a tough assumption to make, as an analyst. I’m just not going to make that bet.”
A stout man who stands 5 feet, 5 inches tall, Adelson informed investors during a conference call in August that he would do whatever was needed to prop up his company.
“As all of you that know me know, I don’t equal the height of Yao Ming or LeBron James or any of the basketball players,” he said. “However, one of my closest friends says, ‘Sheldon, don’t worry about your height. You’re the tallest person I know when you stand on your wallet.’ And I’m saying right now the company will not have liquidity problems. Need I say more?”
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There's one thing that the reader can take for granted: If a company plans dozens of casino projects at the same time, then there's definetely a lot of confidence behind. However, you simply can't start so many casino project at the same time if financing is based on speculations on future revenues. If this is what happened and the company is barely able to bay the current interests, Las Vegas Sands seems to be on dire straits. On the other hand, the people who have confidence in LVS and believe in prosperous growth in Singapore, then perhaps there's a little chance of success. I have some stocks and will not sell them under no conditions. I want to see if they can make it or not. I think it's worth the gamble.
I stayed in the venetian back in 2001. i found the staff to be very surly and miserable. The comps are very poor. The rooms were nothing special. I would never stay at this hotel again.
The debt load LVS carries will bankrupt it. They are unable to work the old Vegas 'values' (cheap rooms, cheap buffets, comps to shows) because the debt load will not permit this.
Vegas used to survive other recessions easily because we were a 'value' destination. When times were tough in America, Vegas became a popular destination because of the value. So all the more expensive vacations like Hawaii, Florida, California, and New York would be cancelled and they'd come to Vegas.
The first casino to offer a 3 day 2 night stay with 8 free buffet comps, and transportation to/from airport, all for $99 per person (no gimmicks, includes taxes), will see a packed casino. Your gambling win more than covers the loss on rooms and food.
The psychology of the gambler is in your favor. They justify their losses with the great deal on room and food. They'll max the credit cards gambling, then thank you for that free meal and transportation back to the airport.
It's simple: Greed and ego is what drives guys like Adelson
It's Karma in the purist sense. Casino tycoons made their riches by enticing people to accept that being on the wrong side of a bet is just good entertainment. Now, just like the sheep who stayed at the table too long, Guys like Adelson and Trump have played one too many hands. SORRY, Dealer Busts! and when the dust settles, 2/3 of his empire will be owned by Arabs and the Chinese. The World's bubble has burst and it will OVER CORRECT to depths you have never imaged. It will take 5 years to crawl out from that black hole.
Where is the nit wit ranter who blames this and everything else on Harry Reid and Pelosi?
And lets not forget if big oil could drill baby drill this would not have happened either. Of course what has happened to gasoloine prices? Another ridiculous rant of the nit wit.
All of Mr. Adelson's friendships have certainly
helped him out, especially in Macau, they really
have a special love for him there.
Unfortunately his personal wealth is well protected so it won't really matter what happens to the companies that were built with the philosophy of "greed is great but only when it helps me, me, me.
Las Vegas got caught up in the whole fake economy and so did Sheldon. In fact he stated
that he would be #1 on forbes most wealthy in five years.
Las Vegas is not the Las Vegas it used to be. by the way "double down dealer" 5 years
is when everyone will begin to learn how to crawl, nationalization, or should i say socialism is almost here, starting with banks,
healthcare, and the vehicles we drive.
There will be the rich, and the poor.
no place for middle class anymore.
"scouser"
you pretty much described the experience you get most anywhere in the good ol' USA now.
still a few good places left, but you really got to work to find em.
The Chinese are not happy with Shelly and want to acquire his holdings. They will.
The average US American has between 7 and 10 different credit cards,most of them are maxed out. In other terms...the average American used one credit card's money in order to pay the 3 or 5 per cent minimum needed to keep his other credit cards going. Until the day all cards were completely maxed out. Others, speaking of "owners of homes" backed by bank mortgages, can't pay their mortgage bill because they couldn't get more credit in order to pay off other credits. It's like a snake biting itself in the tail. Before they realized that you must produce something or at least earn the money you decide to spend , they went the other way around and spent before they had it. But now there's no chance for more credit. And that's why the entire bubble burst. Who is to blame? Definetely not Vegas, and not Adelson and his mega projects worldwide. One thing is for sure, the people who where too ignorant to face reality will have to pay somewhat. And Las Vegas Sands is smart enough to invest in other parts of the world, not only Vegas. As a global player, he's smart enough to know that Singapore will be a super jackpot for Las Vegas Sands. Vegas was yesterday...good luck, folks.
"greed is great but only when it helps me, me, me."
Do you have a problem with a American way? You must be a socialist.
Every decade I hear "Vegas is dead", but every decade Vegas emerges bigger and better. Some major casinos with heavy debt load will go bankrupt, they'll be gone. The major bond holders will receive 'ownership' of the operations during bankruptcy liquidation. More than likely the major bond holders, who funded the construction, will try to run the casino for a while before they realize they have no clue what they are doing. Then they'll make a 'fire sale' for pennies on the dollar to someone with cash (Steve Wynn).
Once many of these multi billion dollar properties go bankrupt and trade hands the debt will be gone and Vegas will have another boom.
simply put LVS put way too many projects in motion without funding, the 3 top execs weidner, stone,goldstein as much stock as they could long ago, each worth 200-400 mil easy for a while now. goldstein has had ADD for sometime now. once they became so wealthy they no longer cared and who knows they might be driving the company into chapter 11 by now. It would retire all 3 of them which I think has been the goal for a while now. this same group put the sands in ac into bk years ago. they dont even like adelson and could care less. Adelson is addicted to pain meds which clould judgement. after LVS gets the 11, I think wynn will not be far behind however for different reasons, harrah's and mgm/mirage will sell off properties.
LVS and WYNN just have too much debt service, that LVS room rate is false which the company does by comping rooms for nearly any player. The comp room carries an inflated price which shows as revenue for the streets sake.
this is my opinion only.
I also think that the comped rooms for big players are actually financed by the "regular players" who pay for their room in full, whereas they're still playing on the slots and some b-j. However, filling the casino with lower room rates doesn't make up for the debts and its interests. It takes more than a motobike to win this race for the money.
The situation as it presents itself, pure and simple: America has not enough money to gamble with at the moment. All the Wall Street Super Heroes whose fortunes vanished and the home owners who can't get no more higher credit line on their homes, and all the credit card holders standing up to the head in a mountain of bills, these people are making the big crowd that's missing to fill the Las Vegas casinos. That's the situation, my friends. step one for these problems to be solved is new jobs being created, people working hard and harder for their money to get their heads above water again, and then...maybe, Las Vegas Sands and all the big casinos will be packed of gamblers with money in their pockets again. And johnevegas, if you don't keep your eyes closed, you might realized that this "buy-now-pay tomorrow...or have others pay"-mentality won't work out in the future any longer.
justaputz "I think wynn will not be far behind."
I'll take that bet any time. Especially after reading your post. Very entertaining. Almost entirely B.S., but entertaining. Sounds more like beer talk to me.
FYI, Steve is one of the few owners on the Strip in good condition. His debt is scheduled, and he has plenty of time and options. He and Mr. Ruffin across the street hold envied positions on LVB.
Great article, and you are right. This would be a great case study for MBA students to have to study. You can't run a business expecting only the best. You always need a plan for what you will do if the unexpected occurs. These guys failed to do that, and it cost shareholders big time.
Steve
http://www.stevewoda.com
The bigger they are, the harder they fall. A little humilty would do well for Adelson. It's pure arrogance to piss off everyone on the way up but when you are down, they come a knockin to piss on you.
screw the scumbag just remember what he did to the sand employee it must be karma
Over the years, I stayed at the Venetian many times. Almost always the staff was polite, helpful, and treated me well. Problems I can remember stemmed from long waits to calls made to the front desk, and some delays in bringing up extra towels and stuff like that. Recently, I've stayed at the Palazzo about 6 days over two visits. My biggest complaint was the casino floor, which was covered with full, smelly, ashtrays and many half empty glasses. I met with the floor manager the next day and that night I actually saw executives in suits cleaning up the floors with stacked hands full of ash trays and glasses, I kid you not. Both hotels are well run, the Venetian actually feels a bit old now, and the new living garden show which is free is phenomenal at the Palazzo.
I am not a wealthy man. My trips to the Palazzo were comped. I won a small sum, about $500.00, after my first comped trip, and played most of it back. I was invited back after to stay for free up to 3 nights, with about $50.00 in free play. I continue to be invited back without having to play large amounts. Many people are comped everyday by both of these hotels. If your going to play, my advice is play in the upscale hotels. You will be comped and you will have a better overall experience. The Strip is still the place to be but you've got to play to stay.
I found the Venetian to my mind, to be a somewhat cheap pre-fabricated imitation of Bellagio. Bigger is not always better.