Posted by: Frederik Balfour on November 7, 2008
I remember how Sheldon Adelson seemed to be on top of the world the night the Venetian hotel and casino complex in Macao opened on August 28 2007. Standing beside his charming wife Miriam on the mezzanine level of the Venetian at the top of double spiral escalators, they reminded me of a royal couple benignly looking down on their empire below. Earlier that day he had told a press conference how “The opening is the beginning of what has been my dream, to reproduce the capital of entertainment [of Las Vegas] in Asia for Asians.”
Now that dream is looking mighty dicey. Adelson’s pile of chips has grown terribly meager of late [I wonder if he’s regretting the $250,000 appearance fee paid to Diana Ross at last year’s Macao bash] thanks to the credit crunch, slower than expected revenue growth in Macao and a slump in his Las Vegas convention business. On Nov. 6 shares of his company Las Vegas Sands plunged 33% on news that it may not meet loan covenants on some portions of an estimated $8.8 billion in debt.
Some of the problems at Adelson’s Las Vegas Sands group aren’t of his doing. All of Macao is suffering from oversupply of hotel rooms—the Venetian itself boasts 3000 rooms—and a dearth of gimlet eyed gamblers from the mainland after Beijing introduced tighter visa restrictions which severely curtailed the number of tourists who could visit Macao in August.
After a few years of blistering growth, revenues in Macao fell 10% quarter on quarter during the three months ended September 30, while junket operators who bring in the high rollers that account for the lion’s share of house takings got a fatter slice of margins.
But as Credit Suisse gaming analyst in Hong Kong Gabriel Chan explains, Adelson made a wager on very long odds that just hasn’t worked out. “The LVS situation is because of overexpansion and being too aggressive on three different locations at once,” he said by telephone today. As a result, construction work on several new properties belong to LVS will likely be stalled in Macao where Adelson has burned through his $3.3 billion loan facility. Although he is generating positive operating cash flow, he doesn’t have positive free cash flow that can be used to further expansion on the Cotai Strip in Macao. The original plan was to get hotel developers to help ante up for construction costs, but when they balked at the idea a couple of years ago, Adelson decided to go it alone, and bring in operators once the properties were built. So far only the Four Seasons hotel has been completed and opened, while hotel-casinos bearing the St. Regis, Sheraton, Shangri-La and Traders monikers will be put on hold until Adelson solves his financial dilemma.
While he should be able to keep his head above water in Macao, Singapore poses another headache. Adelson needs to raise an additional $500 million to $600 million of cash to come up with the $1 billion equity contribution he needs to qualify for the 80% [$4 billion] in debt to finance the $5 billion price tag for his Marina Bay Sands project there.
Some market observers are wondering if Singapore might stump up the funds and become an equity partner with Las Vegas Sands. However that seems unlikely as the puritanical government would have serious reservations about bankrolling a gambling facility. [Indeed, once the casino is built, it will still be off limits to local citizens.]