Las Vegas Sands, Inc. is proposing to build a mega-resort on the site of the imploded Sands Hotel & Casino on the Las Vegas Strip. The development as planned would boast 6,000 rooms, 200,000 square feet of casino space and 500,000 square feet of retail space, an ambitious undertaking for all but the most experienced casino companies.
Las Vegas Sands and Chairman Sheldon Adelson are currently attempting
to raise financing for this project, which is estimated to cost $1.8 billion,
although the details of the financial structure have not been finalized.
The Culinary Union, which represents 40,000 casino workers in Las Vegas
and had a collective bargaining agreement with the old Sands, has analyzed
this project since its inception. We believe that potential investors,
bankers, and underwriters should consider the following risks while assessing
Las Vegas Sands’ Troublesome History
In 1989, Las Vegas Sands, Inc. was formed by Sheldon Adelson and his partners in Interface Group, then-owner of the computer trade show COMDEX, to purchase the Sands Hotel & Casino from MGM Grand. Their plans for the property included renovating the facility and building a hotel tower and a convention center.
Las Vegas Sands’ purchase and construction plans were financed through three mortgages: a first mortgage of $85 million from Canadian Imperial Bank of Commerce (CIBC) for construction of a hotel tower; between $70 - $85 million worth of Second Mortgage Notes due 2001, bearing interest at 15%; and between $46.5 - $128.5 million of Pay In Kind Third Mortgage Notes due 2004, bearing interest at 14% and payable to Interface.
In 1990 and 1991, the company’s expansion plans encountered problems. The planned hotel tower was never built, for reasons discussed below, and according to county records, on July 27, 1991 the CIBC deed of trust for construction of that tower was reconveyed.
The second and third mortgage notes remain outstanding. Whether or not Las Vegas Sands intends to refinance these notes through the new resort’s project funding, the existing debt obligations add substantially to the $1.8 billion construction estimates for the project. In particular, according to the recorded deed of trust, the Pay-In-Kind notes have accrued interest for the last 8 years, turning a initial balance of $46.5 million into an outstanding balance of approximately $116 million as of April 1996. Unless substantial portions of the principal have been paid on either note, the company’s existing debt could amount to $186 million.
Moreover, the assets securing that debt and future project financing have diminished. Following Interface Group’s sale of COMDEX, Mr. Adelson bought his partners out of Las Vegas Sands, Inc. and transferred the million square foot Sands Expo Center from Las Vegas Sands to Interface Group-Nevada.
That means the Sands Expo Center, which Mr. Adelson touts as integral to this project, is not owned by the developer, Las Vegas Sands. Curiously, development plans include adding 200,000 square feet of convention space to the Expo Center, although it is no longer owned by Las Vegas Sands. This conveyance raises the question of whether that expansion will be available as collateral for project financing, and it suggests that the Expo Center’s ongoing operation will be shielded from the reach of lenders.
If the existing debt obligations are refinanced, repayment of the Pay-In-Kind notes will generate up to $116 million for Mr. Adelson’s own Interface Group. If not, these obligations will come due in 2001 and 2004, not long after the Sands mega-resort is scheduled to open and in all likelihood before the project financing matures.
Mr. Adelson, “The Impossible Taskmaster”
Mr. Adelson is Chairman and sole stockholder of Las Vegas Sands, Inc. As such, his management style will set the tone for this mammoth project. His experience at the Sands sheds light on that style.
Shortly before purchasing the Sands, Mr. Adelson hired an architect named Nikita Zukov to design the expansion project. Nine months later, Mr. Zukov was terminated ostensibly for failing to stick within the budget. In January 1990, he sued Las Vegas Sands for breach of contract and won a $1.3 million judgment in district court. The case was not appealed and the lien for the judgment was released.
Zukov vs. Las Vegas Sands revealed significant problems in Mr. Adelson’s first casino expansion project. In addition to Mr. Zukov, former Sands construction and casino managers and architects who were approached to complete the project testified in the case. The following are quotes from that testimony:
Tim Donovan, a project manager for Gustafson Paulsen & Associates, which prepared a cost estimate for the Sands project, stated the following in a deposition:
“The assignment that I thought I was given on that Wednesday morning was to conceptually estimate the design as it existed and inform the owners as to the approximate costs that they would be facing…. It’s very unusual, especially if they are trying to get financing, to totally disregard actual projected costs on a project and stick with a total number that has no basis in reality.”
Mr. Zukov testified:
“The partners of Sheldon Adelson talked about staying within certain budgets, but Mr. Adelson adamantly always said that he wanted what he wanted and that he had more than enough money to pay for what he wanted.”
“All I knew is that Mr. Adelson, whatever figures we gave him, was never committed. He never committed to one thing or another. He made – he said many times that if they needed more money than the 130 [million dollars] which we discussed as an approximate number sometime in March, that he would get more money for the project.”
Arnold Schrader, former Sands construction manager, testified:
“Mr. Adelson never had what I would consider to be the professional knowledge in the hotel casino business to really know what should be included or excluded, and he always made changes on a daily basis to a point where I think a lot of people were getting dissatisfied and losing interest.”
Henri Lewin, a principal of Mr. Adelson’s first management company at the Sands, Aristocrat Hotels, said:
“Every two weeks starting May 1989, every two weeks. First the building was 36 floors; then it was 42 floors. It was my experience 42 floors cost a lot of money. Because it has a high rise extra cost of new elevators. Then he (Adelson) wanted a ballroom on top like the Riviera. And when you have a ballroom on top you need a kitchen – and you need a kitchen. I mean I could talk here for hours.”
Ken Scholl, another principal of Aristocrat Hotels, testified:
“I wouldn’t know how much money Sheldon Adelson had, but I remember
what he said to us at the meetings, that he – ‘Don’t worry about the money,
this is what I want.’ And he was very firm as Sheldon always was in what
“… But Adelson doesn’t want to listen to the advice Nikita’s giving him. He’s just telling him what he wants him to do. And it was very frustrating. It was very frustrating for us, too, because all we wanted to do was get this project moving.”
Brian Webb, an architect who was approached to complete the redesign project after Mr. Zukov was terminated, testified that the budget had not been set, despite the fact that Mr. Zukov had been working for months on the design. He said:
“As far as budget was concerned, going back to the first meeting, no budget was ever mentioned. And the way in which the client was talking to me, it was obvious that we hadn’t got to a stage where a budget could be developed, because it was moving all over the map, as far as the project was concerned.”
Mr. Zukov stated:
“There was only one man who runs – as you’ve heard through all the depositions, there’s only one man at the Sands and one man in Boston. There’s only one person. There may be five persons, but there’s only one person who makes the decisions, tells everyone what to say, what to do and that’s it.”
After nine months of working with Mr. Zukov, the Sands had to come up with new plans to construct the Expo Center and renovate the casino. The hotel tower was never built. The Sands argued in a November 28,1992 article in the Las Vegas Review-Journal that it lost $42 million in potential revenue because of construction delays.
This testimony raises the very real prospect of construction delays, cost overruns, changes in plans midstream, and expensive litigation in a development over ten times the size of the first Sands expansion project. It also suggests that Mr. Adelson’s hands-on approach may overpower his current development team.
Changing Sands: Management Turnover
In November 1995, Mr. Adelson hired William Weidner, former President of Pratt Hotel Corp, owner of the Atlantic City Sands , to head the development and management team for the proposed mega-resort. Prior to Mr. Weidner’s team, Mr. Adelson had five other management teams running the old Sands in the seven years before it was imploded. The first four top executives each left within 10 months of their hire. The fourth, Phil Bryan, was hired after Mr. Adelson spent nine months attempting to run the casino himself. Mr. Bryan left after only nine weeks.
Las Vegas Sands’ first management team was Aristocrat Hotels, which sued Las Vegas Sands for breach of contract after its dismissal. The case was settled out of court after four years of litigation.
Depositions in that case were consistent with those given in the Zukov case.
Alvin Benedict, the second Sands president under Mr. Adelson, was asked in a deposition:
“Q: In light of the way that you personally now know Sheldon Adelson’s management choices and the way he conducts his business, did you feel that you could operate the Sands Hotel successfully, profitable [sic], with the Adelson method of ownership?
Q: What’s the basis for your answer?
“Well, Mr. Adelson was very unpredictable. Without getting into his character, he went through – had a habit of going in and having temper tantrums, he had a distrust for everybody that either worked for me, or worked in the hotel. He was a very unethical man.”
Ken Scholl, principal of Aristocrat Hotels, said:
“I mean, it was a very difficult, upsetting way for a management company to try to operate because owners are always looked at with respect and people believe everything they say and there were numerous people that came in from Interface that had no knowledge of how a hotel operates and would make comments that were extremely disruptive to our operation.”
Two questions are raised by Mr. Adelson’s management history:
The Sands’ Marketing Strategy
Although neither Mr. Adelson nor Mr. Weidner has experience operating a mega-resort in Las Vegas, the new Sands expects to compete directly with the Mirage Casino-Hotel, which employs one of the most sophisticated marketing strategies in the business.
According to the project’s traffic study, “the expanded Sands Hotel and Casino will cater to the same market share as the Mirage Hotel and Casino….” A December 2, 1996 article in the Review-Journal noted, “Sheldon Adelson is convinced the Las Vegas market will handle 6,000 Venetian-themed rooms, each going for about $280 a night…similar to those offered by Steve Wynn’s Bellagio complex.”
Mr. Wynn, Chairman of Mirage Resorts, has over twenty years of experience operating casinos in Las Vegas, and he is the industry’s premier visionary. In those twenty years, he built an upper-middle class market at the Golden Nugget downtown, branched from that market to the upscale Mirage on the Strip, and developed Treasure Island to complement the Mirage by catering to the lower end of its upscale market. Bellagio, a 3,000-room resort and top-of-the-line retail complex under construction, is the next step in Mirage Resorts’ sophisticated marketing plan. That plan takes advantage of the nuances of the upscale market by creating casinos that cater to customers with slightly different spending habits within the high end of the market.
Mr. Adelson, on the other hand, has a different view:
“’In every business I’ve been in, I’ve never know the business in depth,’ Adelson said, ‘but that’s a good thing. I’m not constrained by taboos.’”
Gaming’s high-end players will be courted by a number of new casino developments other than the Sands, all planned by experienced gaming companies. In addition to Bellagio, Circus Circus Enterprises is planning to develop a five-star Four Seasons Hotel to complement its mile-long casino development adjacent to Luxor, MGM Grand intends to develop a separate, exclusive hotel on its casino site for high-rollers, the Sheraton Desert Inn is undertaking renovations in an effort to earn a five-star rating, and Caesars Palace is in the midst of a $900 million expansion.
Additionally, MGM Grand and Bellagio are developing upscale shopping malls in conjunction with their casinos, and Caesars Palace is doubling the size of its Forum Shops. These developments and the nearby Fashion Show Mall will compete with the Sands’ plans to develop 2 – 250,00 square foot retail complexes to be located in the two proposed hotel towers.
Furthermore, Mr. Adelson’s projected $280 average room rate would appear to run counter to his plan to utilize conventions to fill his 6,000 rooms. In February 1995, Mr. Adelson was sensitive to the cost of rooms affecting the COMDEX convention, telling the Review-Journal:
“’Continuation of rising room rates has to be considered,’ Adelson said. While casinos must recognize that Comdex attendees do little gambling, Adelson considers it unfair to charge $189 per night for a room during Comdex that goes for $29 after the show."
Conventioneers, who are anticipated to be a significant portion of the Sands’ customers, may not be prepared to pay such high room rates.
Is It Too Big?
Two reputable gaming analysts have privately stated that the Sands development is too big. The analysts independently suggested that 3,000 rooms would be a more realistic size, and one suggested that the financial markets may not support 6,000 rooms. Most of the other proposed mega-resorts on the Strip top out at 3,000 rooms, suggesting an optimum size for mega-resorts that affirms the analysts’ statements.
Only MGM Grand has constructed a hotel-casino close to the scale of the proposed Sands, and that operation lost money before new management with extensive Las Vegas experience – led by J. Terrence Lanni – was hired to run the resort.
The Sands’ size will in all likelihood contribute to higher financing costs. This stand-alone project, with no supporting cash flow, could face capital costs double those of its primary competitors. While Mr. Adelson is expected to contribute a significant amount of equity to the Sands project, its $1.8 billion price tag suggests that he will need to borrow upwards of $1 billion. No gaming company has issued $1 billion of debt for a single development. By contrast, Mirage Resorts recently negotiated an increase in its credit line – currently at 5.75% interest – to finance its expansion plans. Circus Circus Enterprises and Hilton Hotels also have investment grade debt and borrow funds at similarly low rates.
The question of the Sands’ size is also relevant to the ongoing discussions about the endless boom in Las Vegas. Analysts have raised general concerns about supply outpacing demand, and recent gaming revenue reports show flat winnings when compared to last year’s numbers. According to the State Gaming Control Board, bacarrat revenues, an indicator of the level of high-stakes play, decreased by 21.5% for the year ending December 31, 1996 (over the previous year) for the 19 largest Strip casinos. Those casinos’ total gaming revenues for the same period were down 3.3%. Filling 6,000 rooms in this environment will be a challenge.
Not only will the Sands have to compete for customers in an intensely competitive market, the Sands plans to open part of its resort before construction is completed. According to county documents, Las Vegas Sands plans to open the South Tower with 3,000 rooms, 96,000 square feet of casino space, and approximately 250,000 square feet of retail space in late 1998, while the other half of this development is scheduled to open in the third quarter of 1999. This phased development schedule adds to the project’s risks by exposing its first customers to the inconveniences of construction.
Stratosphere Tower, Casino & Hotel was the last resort to open unfinished, and the results were disastrous. Stratosphere filed for bankruptcy reorganization months after it opened, leaving a second hotel tower and retail center partially built. In light of those problems, analysts acknowledged that casinos do not get second chances in the Las Vegas gaming environment and that an incomplete project contributed to the casino’s financial crisis.
Additionally, even well-established casino operations suffer from the disruptions associated with on-site construction. In September 1996, ITT announced declines in expected earnings attributable to the impact of construction at Caesars Palace and Sheraton Desert Inn, and in February, 1997, Circus Circus Enterprises reported a 57% drop in net income resulting from room-tower construction at both Luxor and Circus Circus.
New York-New York, a joint venture of MGM Grand and Primadonna Resorts, delayed its December 1996 opening by a month, missing the New Year’s Eve crowds, to finish all of its planned improvements and take heed of Stratosphere’s mistakes.
“Brewing brouhaha with the Culinary Union”
Las Vegas Sands has made clear its intention of operating the new mega-resort non-union, despite the fact that the original Sands Hotel & Casino had been under contract with the Culinary Union since it opened in the 1950s. We believe an anti-union approach to operations is not only unnecessary, but it also carries with it a number of tangible risks.
Compare the mega-Sands’ prospects with the experience of MGM Grand, an industry leader, in its now-resolved dispute over unionization.
MGM Grand opened non-union in December 1993 under the leadership of Mr. Robert Maxey, an anti-union ideologue who designed the casino’s operating plan around the goal of maintaining non-union status. MGM Grand’s position was in direct conflict with the standard in the Las Vegas industry, set by leaders like Mirage Resorts and Circus Circus Enterprises. These companies had agreed not to fight unionization of their new resorts by recognizing the union if a majority of the new property’s employees signed union authorization cards. This procedure has been used to establish union operations at the Mirage, Excalibur, Treasure Island, Luxor, Stratosphere, Monte Carlo, and New York-New York without divisive organizing campaigns.
Instead, MGM Grand chose to fight unionization. In order to do so, the company was forced to establish a wage and benefit package that met or exceeded union scale, thereby erasing the perceived economic advantage to operating non-union. In addition, MGM Grand retained an elaborate and very costly array of consultants and lawyers to design a political and workplace campaign against the union. The hotel also maintained staffing levels that were high by industry standards for fear of strengthening the Union’s hand through layoffs. The Union question was MGM Grand’s top priority from day-one and distracted the company from effectively managing the property.
The opening night picketline at the MGM Grand boasted over 5,000 union members and was respected by a host of high-ranking state and local officials who did not attend the VIP opening, including Governor Bob Miller, US Senators Harry Reid and Richard Bryan, and Las Vegas Mayor Jan Jones. MGM Grand was the first mega-resort opening that the State’s Governor did not attend. Then in May 1994, prompted by MGM Grand’s assertion that it owned and controlled the sidewalks around the casino, approximately 4,500 union members rallied in support while over 500 of them were arrested for picketing on MGM’s sidewalk. The sidewalk issue caused the union to sue MGM Grand, Clark County and the County Manager for conspiring to violate the civil rights of Las Vegas’ union members. A desire to settle the lawsuit was one of the motivations behind the resolution of the labor dispute.
MGM’s preoccupation with operating non-union contributed to the company’s dismal financial performance. During fiscal 1995, MGM Grand reported a 37.5% decrease in net income from 1994. The abysmal financial performance ultimately led to a decision to resolve the labor dispute and get on with effectively managing the mega-resort.
In June 1995, MGM Grand made the transition to new management under the direction of now-Chairman Lanni. That transition encompassed a new approach to operations, expansion plans, and labor relations, which has been very successful. On Mr. Lanni’s watch, MGM Grand’s net income rose a record 527% in the first quarter of 1996 (compared to 1995’s first quarter). Also under Mr. Lanni, MGM Grand has recognized the Culinary Union and commenced negotiations for a collective bargaining agreement.
Mr. Maxey’s strategy, which has been adopted by Mr. Adelson, is a proven failure. Moreover, the Sands mega-resort’s business will be particularly vulnerable to a labor dispute given its plan to fill its room with conventioneers attending the Sands Expo Center. It has been our experience that convention planners and attendees are more sensitive to labor problems than the average Las Vegas tourist.
The public nature of this labor dispute has reportedly caused one retail developer to bow out of the project. According to an October 8, 1996 Review-Journal article, Rouse Corporation, a national real estate and mall developer and owner of the Strip’s Fashion Show Mall, chose not to develop the retail portion of the Sands project:
“The deal fell apart for several reasons, sources report, including the developer’s worry that a partnership with the Sands might not be worth the problems. . . . But even more significant, sources say, was the Sands’ brewing brouhaha with the Culinary Union, which Rouse and Hughes officials apparently believe is an enemy not worth having.”
The leading gaming analyst in the country, Bear Stearns’ Jason Ader, concluded 1996 by saying: “We believe the winning strategy is to invest in large companies that have strong management teams, access to low-cost capital, and a solid track record in developing new properties.”
Las Vegas Sands has none of these attributes. Instead it has the risk
of delays and cost overruns, inconsistent management, a high debt burden,
and an unnecessary labor dispute.
The Culinary Union has prepared this release as an addendum to its report, entitled "Castles Made of Sand," analyzing the risks of the Venetian Casino Resort in Las Vegas.
Venetian Casino Resort LLC and co-issuer Las Vegas Sands Inc. are issuing Mortgage Notes and Senior Subordinated Notes, totaling $500 million and underwritten by Goldman, Sachs Co. and Bear, Stearns Co.
In addition to the risks discussed in "Castles Made of Sand," the Culinary Union raises the following issues for consideration by potential investors:
1. On June 26, 1997, Goldman Sachs Mortgage Company as Syndication Agent loaned Interface Group-Nevada, owner of the Sands Expo Center, $110 million of senior debt collateralized by the Expo. Mr. Sheldon Adelson is the sole stockholder of both Venetian Casino Resort and Interface Group-Nevada. This Goldman Sachs loan raises the following question: Is Mr. Adelson's $95 million "equity" contribution to Venetian Casino Resort being funded by the proceeds of the Goldman Sachs loan to Interface?
2. Why did Mr. Adelson take a $20 million dividend from Las Vegas Sands Inc. in July 1997, prior to seeking $890 million in debt financing for the Venetian?
3. Las Vegas Sands Inc., which will operate the Venetian, will elect William J. Raggio as a Special Director upon consummation of the offering. Mr. Raggio is a Director of Santa Fe Gaming, a Las Vegas-based casino company with a history of failed or stalled expansion projects (in Illinois, Missouri, Mississippi, and Henderson, Nevada). Santa Fe Gaming also has bonds trading below par and a stock price of 75 cents per share, down from $18 in October 1993. That company has been plagued by a four-year-old labor dispute with the Culinary Union stemming from an election at the Santa Fe Hotel, which was won by the Union in October 1993 and litigated for years by management.
4. Venetian Casino Resort's high cash flow and operating income projections are very dependent on aggressive projected room income. The company projects $126 million in departmental profit from rooms in year one, by assuming an Average Daily Room Rate of $167 in its first year of operations and a 93% occupancy rate. By comparison, according to analysts, in the year ending ending Dec. 31, 1996, the Mirage Casino-Hotel's ADR was approximately $120 and Treasure Island's ADR was approximately $100, both highly successful operations. By 2000, an additional 10,000 rooms are expected to be opened on the Las Vegas Strip, putting intense competitive pressure on room and occupancy rates at the Venetian.
5. Excluding mall operations, the Venetian also projects EBITDA of $198.2 million in the first year, representing 40% of projected revenues. By comparison, in 1996, MGM Grand generated $259 million in EBITDA, or 32% of revenues, primarily from its Las Vegas casino. The MGM Grand Hotel-Casino has 2,000 more rooms and 47% more casino space than the proposed Venetian Casino Resort.
6. Venetian Casino Resort is relying heavily on convention business from the adjacent Expo Center. It should be known that Mr. Adelson's Expo Center charges three times as much for convention space as the Las Vegas Convention Center, which is currently expanding its capacity. Also, convention bookings often entail simultaneous negotiations over rates for rooms and convention space. Mr. Adelson has a conflict of interest between room rates charged by the Venetian and space rates charged by the Expo, and noteholders will have no recourse to the assets of the Expo Center.
These issues, coupled with the concerns raised by the Union in "Castles Made of Sand" should be considered carefully by potential investors.
For further information, contact Courtney Alexander, Culinary Union Research Director, at 702/387-7082.
Reprinted with permission;