gaming:

CityCenter partner might want more say

Experts say Dubai World’s lawsuit not an attempt to exit, but to exert greater control

Justin M. Bowen / File photo

A scaled model of the completed CityCenter project sits in the visitors center in the Bellagio. The $8.7 billion project is expected to bring more than 10,000 jobs to the Las Vegas area.

By Liz Benston (contact)

Wednesday, March 25, 2009 | 2 a.m.

Lending pitch from Ensign and Reid so far on ethical up-and-up

Download the Dubai World lawsuit

CityCenter Construction

You need to upgrade your Flash Player

Reid, Ensign made calls to banks for MGM (3-23-2009)
Lawsuit clouds future of CityCenter; MGM responds (3-23-2009)
MGM Mirage gets debt waiver, swings to quarterly loss (3-17-2009)
Before recession, success further fed gaming industry's egos (3-16-2009)

Dubai World argues in the lawsuit it filed this week that MGM Mirage has defaulted on its CityCenter agreement, giving the foreign conglomerate the legal right to sever the relationship.

But gaming industry analysts and other observers say the real purpose of the lawsuit is not to break the partnership. Rather, they say Dubai World apparently wants to continue working with MGM Mirage, CityCenter’s managing partner — with one major change. Dubai World wants either greater control over the troubled $8.7 billion project or a larger stake for the $4.3 billion it has invested.

Were Dubai World to pull out, it would leave the project in limbo, threatening more than 10,000 jobs and rendering its investment worthless, the observers noted.

“It’s so far along, and the wind-down costs would be so great, that it’s most beneficial at this point to get it open” and making money, said Dennis Farrell Jr., a bond analyst with Wachovia Capital Markets.

In a news release Monday announcing the lawsuit, Dubai World commended CityCenter’s “enormous value” to investors and Las Vegas. The lawsuit will ensure that CityCenter is completed “on acceptable terms,” the release said.

The lawsuit claims MGM Mirage defaulted on its CityCenter joint venture agreement when the company admitted its financial troubles in an annual report filed with the Securities and Exchange Commission on March 17.

Specifically, MGM Mirage said it was unlikely to meet certain financial requirements imposed by its bank lenders and therefore received a waiver of those requirements until May 15. But that short-term waiver, which buys the company time to solve its cash crunch, wasn’t enough to prevent the company from admitting that “there is substantial doubt about our ability to continue as a going concern.”

The accounting term — going concern — typically crops up in the earnings reports of companies that are at risk of filing for Chapter 11 bankruptcy protection.

MGM Mirage said Tuesday that the lawsuit has no merit, but has declined to elaborate on the reasons.

Dubai World representatives declined further comment.

Dubai World also asserts in the lawsuit that MGM Mirage breached the agreement by mismanaging CityCenter.

MGM Mirage allowed CityCenter’s budget to spiral upward “without regard to appropriate accountability,” according to the lawsuit. Many cost overruns were not shared with Dubai World beforehand, demonstrating a “lack of candor” by MGM Mirage, the lawsuit continues.

When Dubai World signed the project joint venture agreement in August 2007, MGM Mirage hadn’t nailed down a final cost for CityCenter — a project with a budget that has been in flux since Day One. The company didn’t sign final price contracts with its general contractor, Perini Building Co., until the following year.

Dubai World says at the time of the joint venture agreement, MGM Mirage estimated CityCenter would cost $7.5 billion. MGM Mirage has since increased that estimate by about $1.2 billion, with further increases likely despite recent moves to scale back some aspects of CityCenter, the lawsuit says.

The joint venture agreement created a separate company, CityCenter Holdings LLC, with a board of directors made up of three MGM Mirage executives and three Dubai World executives. Board members must sign off on all major scope and budget changes and MGM Mirage is required to regularly update Dubai World on CityCenter’s progress and budget. These include monthly reports on construction, leasing, sales and financing. Dubai World representatives are also invited to attend weekly construction job meetings.

The lawsuit will turn on an interpretation of what constitutes a default.

The joint venture agreement states that either partner defaults on the agreement if it admits, in writing, “its inability to pay its debts as they come due.”

MGM Mirage is still making debt payments, but auditors believed there was a high enough degree of uncertainty about MGM Mirage’s ability to make debt payments and fund CityCenter — given the $1.2 billion needed to complete CityCenter and another $1 billion in bonds coming due this year — to warrant a warning.

Before the annual report’s release, CEO Jim Murren downplayed the anticipated “going concern” warning in a letter to MGM Mirage employees, saying the company’s auditors use the phrase as a required note of caution that doesn’t reflect on the quality and popularity of its casinos.

A Chapter 11 bankruptcy filing by MGM Mirage would also put CityCenter into default, which could force the project into bankruptcy court. While that might help MGM Mirage restructure those debts, it might hurt CityCenter’s prospects by allowing a court to dictate whether the company can continue to fund CityCenter while creditors, who take precedence over shareholders in bankruptcy, are owed money.

“If they file for Chapter 11, CityCenter could be delayed or suspended indefinitely,” Farrell said.

In a research note to investors Tuesday, Farrell said he thinks a Chapter 11 filing looks more likely now that Dubai World is seeking damages against MGM Mirage, further hampering CityCenter’s ability to get financing to complete the project.

That’s a major reason for MGM Mirage to attempt to avoid seeking bankruptcy protection, as well as a reason for Dubai World to prevent MGM Mirage from entering bankruptcy reorganization.

A default by MGM Mirage would allow Dubai World to buy out MGM Mirage’s interest in the project, and vice versa, according to the joint venture agreement. That scenario puts Dubai World in control of its investment but may not be ideal for CityCenter’s financial future, analysts say, especially because Dubai World has never operated casinos, let alone a resort in Las Vegas.

“MGM Mirage is still the 800-pound gorilla on the Strip,” Macquarie Capital stock analyst Joel Simkins said. “They have relationships with millions of customers that would be hard for any suitor to replicate at CityCenter. MGM Mirage might have gotten their leverage wrong in this downturn, but they certainly know how to run casinos.”

Discussion: 11 comments so far…

By Houstonjac

3/25/09 at 6:07 a.m.

Suggest removal

There is a great deal of uncertainty surrounding MGMMirage's future. But the recent intervention into the situation by Reid and Ensign signify the importance of this project to Nevada, and may thrust the CityCenter project into the "too big to fail" category. The fact that the project
specifications and budgets were not definitized sufficiently when the two partners formed the Joint Venture will weaken Dubai World's claim of
breach of warranty in its recent lawsuit. The fact that Reid and Ensign have been discussing the overall financing of the project with MGMMIrage's banks could bring success to the finacing component of the project, thereby blunting Dubai World's other claim of breach under the lawsuit--MGMMirage's ability to pay their bills when due. The completion of the project is so close now, that it cannot be allowed to fail, either in the short term or long term.
By Guy Demarco (Staff)

3/25/09 at 7:13 a.m.

Suggest removal

The Dubai World lawsuit and the future of CityCenter are the main topics of today's Face to Face with Jon Ralston. We're talking with Deutsche Bank gaming analyst Bill Lerner and high-rise condo expert Paul Murad. That's at 5:30pm, 6:30pm and 8:00pm on Las Vegas ONE, Cox channel 19.
By bdover

3/25/09 at 7:18 a.m.

Suggest removal

When you build a giant project with Union workers, you have to throw another 30% or so into the budget. This is a known Tony Soprano fact. Now that the project is in turmoil, the glazers, insulators, and especially the fire sprinkler loafers will only slow down to keep their jobs. The phrase "Slow down, kid, you're killing the job" applies here.
By doggieman

3/25/09 at 7:33 a.m.

Suggest removal

Start preparing now for the auction of about 4000 units this time next year!
By B_Perini_and_Sons

3/25/09 at 7:55 a.m.

Suggest removal

Mr De Marco,
Have John Ralston ask the question; "What will the impact of the class action lawsuit charging City Center Broker of Record (the esteemed and revered) Mssrs. Bob Hamrick and Tony Dennis with hundreds of illegal and unlicensed City Center condo sales to unsuspecting dupes in California be on the overall cash flow of the Partnership with Dubai World Infinity when none of these sales close escrow when this comes to light?".. Interview Scott Bonzell Esq of Oakland California, lead attorney for the plaintiffs.(your very newsroom has a copy of this filing as of 29 January 2009).
Who vetted these people? Hamrick was vetted by Lanni. Lanni doesnt have an MBA and was unqualified to vett anybody. Which begs the question, Lanni knew Hamrick was a bird of a feather and would do anything for money, ill-gotten or otherwise. Hamrick and his number one saleswoman Shanya Goldstein are NOT AT ALL LICENSED to sell in California. IN OTHER WORDS Hamrick sold all these illegal condos with Goldstien to cook the books and to impress Dubai World Infinity at the behest of Lanni (who understands niether arithmetic nor ethics as we all know from his perpetration of a fraud vis a vis his MBA from USC for decades. Hamrick by the way,barley graduated Vo-Tech high school and was never admitted to a college. There was real commonality with Lanni on the education issue) and in essence cuckholded Dubai with phony numbers to entice them to enter a doomed partnership. The condo sales were supposed to pay for the laergest part of building the project. And it was all a lie a fraud. Or as The Good Book says peoples faith in this massive undertaking were built on sand and like the Tower of Babel it's all falling down.HAVE MR RALSTON ASK THIS SEMINAL QUESTION. signed Lou Perini
By dbltrbl

3/25/09 at 11:41 a.m.

Suggest removal

And, Mr. Perini, there are thousands of poor shmucks responding to the hundreds of ads hiring for the two hotels opening; especially the Aria in Dec 09. Not to mention reservation deposits already placed.

In this economy, either they don't have a job now or plan on quitting one they do have. There really is no guarantee these joints will open.
By manfromuncle1

3/25/09 at 1:09 p.m.

Suggest removal

I can't believe how the money we spent on $5 a gallon gas ended up paying for artificial islands in Dubai and a half completed City Center. No wonder we are in the Depression of 2009. I remember how the construction of the Stratosphere was stopped halfway because they ran out of money. Now the City Center fiasco makes Bob Stupak look like a genius--at least he gave Las Vegas a cool iconic tower.
By EFCANOW

3/25/09 at 8:10 p.m.

Suggest removal

MGM Mirage Could of Saved Six Million if they Didn't Hire Union-Busters!

http://www.spfpalocal7777.org/NEWS.html

Follow The Money Trail

http://www.spfpalocal7777.org/DubaiWorld...

http://www.spfpalocal7777.org/index.html...
By nkls3713

3/26/09 at 4:22 a.m.

Suggest removal

Dubai World deserves more control since they are footing more of the bill.
By aml1648

3/26/09 at 3:24 p.m.

Suggest removal

MGM MIRAGE should go into chapter 11 for the bad decision it made. Rescuing this company because it is "too big to fail" only rewards more reckless behaviors in the future.

Once MGM is in chapter 11, the creditors can take over the Citycenter in the same manner that Deutschebank took over the Cosmopolitan next door. The Cosmopolitan is still getting built and will open as planned, only with a different owner.

The same should happen to the Citycenter. The megacomplex (minus the Harmon) will open, the new job openings will be filled. MGM MIRAGE in chapter 11 can act as the OPERATOR of the property ONLY, with the ownership of the property belonging to someone else.

« Previous Ten Next Ten »

Live chat: Tuesday, noon PST; Chat with Krista Creelman; Problem Gambling Center executive director Krista Creelman will answer questions about gambling addiction from Las Vegas Sun readers from noon to 1 p.m. Tuesday, Nov. ... Submit question