A New Mega-Resort for Sin City

Boyd Gaming breaks ground on a new casino on the Las Vegas Strip, but some investors wonder when the $4.8 billion bet will pay off

by Christopher Palmeri

If you're building a mega-resort in Las Vegas, time is money. So on June 19 when executives of Boyd Gaming (BYD) turned the first shovels of dirt on what will be Sin City's newest pleasure palace, the $4.8 billion Echelon, they quickly went from breaking ground to breaking a sweat. "There were 100 trucks [on site]," says Bob Boughner, the Boyd executive in charge of the project. "They were not there for show, they were there for work."

The Echelon's $4.8 billion estimated cost is already $800 million over what company executives had projected when they announced the project in January, 2006. That's due to a combination of rising construction costs and what Boughner says were initial bids based on a limited number of architectural drawings. The Echelon will feature 30 restaurants, five hotels, four spas, two concert venues, a 300,000-square-foot shopping area, and, of course, a casino.

To reduce costs, Boyd is partnering with other companies including Morgans Hotel Group (MHGC), which will build and operate versions of its Delano and Mondrian boutique hotels on the property, as well as mall giant General Growth Properties, which will co-own the shopping mall. AEG Live, the concert and stadium management arm of Denver billionaire Phil Anschutz's empire, will manage a 1,500-seat concert venue. The company did not go the route of other Vegas developers, most notably MGM, and sell individual rooms to investors as condo/hotels, however. "We'd rather have three or four owners than 5,000," Boughner says.

A History of Reinvention

The Echelon is squeezing its way into a crowded table. There are already a number of high-end facilities in town, including Las Vegas Sands' (LVS) Venetian Hotel, MGM Mirage's (MGM) Bellagio and Mandalay Bay, and Wynn Resort's (WYNN) Wynn Casino. All three of those companies are also in expansion mode in Vegas, with Wynn opening a resort called Encore, Las Vegas Sands opening the Palazzo, and MGM creating its $7.4 billion CityCenter, all due before the Echelon's scheduled arrival in 2010. On June 20, MGM announced it was partnering with Kerzner International to build yet another resort on the Strip. A name and cost has not been finalized.

Boughner says Sin City can handle the new growth. He notes the city's climb from just $14 billion in total revenues in 1990 to $30 billion last year. "Las Vegas has a long and rich history of being able to reinvent itself," he says. "We've only begun to tap into international visitation."

Wall Street had been betting that Boyd might just fold. The Echelon will be located on the north end of the Strip, the hottest part of town for new construction. The bulk of the 87 acres were acquired when the company bought the Stardust Casino in 1985 for just $130 million. The value of land on the Strip has risen dramatically since then, and Boyd might have been able to sell the property for as much as $37 million an acre, or $3.1 billion, based on recent transactions.

From Rags to Riches

News of the continuation of the project prompted Thomas Weisel Partners (TWPG) gaming analyst Jake Fuller to downgrade Boyd's stock from overweight to market weight. "People are looking for immediate returns," Fuller says. "There was an expectation in the marketplace they'd sell. Instead, you'll have to sit for three-and-a-half years to see any return on the investment." Boyd has also to deal with a more competitive environment in one of its core markets, off-the-Strip casinos catering to local residents of Las Vegas.

Boyd was founded by entrepreneur Sam Boyd who came to Vegas in 1941 with $80 in his pocket. Working his way up from pit boss, Boyd went on to build a number of off-the-Strip properties, including the California Hotel & Casino in downtown Las Vegas and Sam's Town, one of the first casinos to cater to Las Vegas locals. Boyd Gaming is now run by his son Bill, who oversees an empire of 16 casinos in seven states.

It entered the development big leagues in 2003 when it opened the $1.1 billion Borgata in Atlantic City in partnership with MGM. It was the first new property there in 13 years and prompted a wave of new development in the city. That casino quickly became the top draw in town and the company is currently expanding it. "It was a big away game," Bougher says of the Borgata. "We're delighted to be able to develop where the company started."

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau.